Internal Revenue

bbuulllleettiinnBulletin No. 1999–52December 27, 1999

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

Department of the TreasuryInternal Revenue Service

Social Security Contribution and Benefit Base for 2000 on page 763.Finding Lists begin on page ii.

INCOME TAXRev. Rul. 99–58, page 701.Continuity of interest on repurchase of issuer’s shares.This ruling holds that an open market repurchase of sharesthrough a broker, following a potential reorganization, has noeffect on continuity of interest in a potential reorganization.

T.D. 8847, page 701.Final regulations under section 743, 755, and 1017 of theCode provide guidance to partnerships and their partners con-cerning the optional adjustments to the basis of partnershipproperty, the allocation of basis adjustments among partner-ship assets, and the computation of a partner’s share of theadjusted basis of depreciable partnership property.

Rev. Proc. 99–50, page 757.Combined information reporting. Combined informationreporting by a successor business entity following a mergeror acquisition is permitted in certain situations. Rev. Proc.90–57 and Rev. Rul. 69-556 modified and superseded.

EMPLOYEE PLANS

Notice 99–61, page 762.Weighted average interest rate update. The weightedaverage interest rate for December 1999 and the resultingpermissible range of interest rates used to calculate currentliabilities for purposes of the full funding limitation of section412(c)(7) of the Code are set forth.

EXEMPT ORGANIZATIONSAnnouncement 99–115, page 763.A list is given of organizations now classified as private foun-dations.

ADMINISTRATIVET.D. 8848, page 723.This rule establishes the procedures under which the Ser-

vice may use penalty mail to aid in the location and recoveryof missing children.

Rev. Proc. 99–49, page 725.Methods of accounting; automatic consent. Proceduresare provided under which a taxpayer may obtain automaticconsent of the Commissioner to change certain methods ofaccounting. REv. Proc. 98–60 modified and superseded.

Rev. Proc. 99–51, page 760.This procedure amplifies section 5 of Rev. Proc. 99–3,which sets forth areas of the Code under the jurisdiction ofthe Associate Chief Counsel (Domestic) in which the Servicewill not issue advance rulings or determination letters. Thefollowing issue is added to those listed in section 5: Whethera state law limited partnership electing under section301.7701–3 to be classified as an association taxable as acorporation has more than one class of stock for purposesof section 1361(b)(1)(D). Rev. Proc. 99–3 amplified.

Notice 99–59, page 761.Tax avoidance using distributions of encumbered prop-erty. Taxpayers and their representatives are alerted that thepurported losses arising from certain types of transactions arenot properly allowable for federal income tax purposes. Also,the Service may impose penalties on participants in thesetransactions or, as applicable on persons who participate inthe promotion or reporting of these transactions.

Notice 99–60, page 762.Information reporting; royalty payments; Indians. Taxpay-ers are informed that the information reporting requirementsof section 6050N of the Code do no apply to payments of roy-alties that are not subject to income tax because they are de-rived directly by a noncompetent Indian from allotted and re-stricted land under the General Allotment Act of similar acts.

Announcement 99–116, page 763.This document corrects the Actions on Decisions publishedin 1999–35 I.R.B. 314. All 7 footnotes describing the “Ac-quiescence” or “Nonacquiescence” in each decision in-cluded the words “in result only,” which were erroneous. Thecorrect footnotes are printed in this announcement.

The Internal Revenue Bulletin is the authoritative instrumentof the Commissioner of Internal Revenue for announcing offi-cial rulings and procedures of the Internal Revenue Serviceand for publishing Treasury Decisions, Executive Orders, TaxConventions, legislation, court decisions, and other items ofgeneral interest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscriptionbasis. Bulletin contents are consolidated semiannually intoCumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of in-ternal management are not published; however, statementsof internal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulingsto taxpayers or technical advice to Service field offices,identifying details and information of a confidential natureare deleted to prevent unwarranted invasions of privacy andto comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not havethe force and effect of Treasury Department Regulations,but they may be used as precedents. Unpublished rulingswill not be relied on, used, or cited as precedents by Servicepersonnel in the disposition of other cases. In applying pub-lished rulings and procedures, the effect of subsequent leg-islation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and oth-ers concerned are cautioned against reaching the same con-clusions in other cases unless the facts and circumstancesare substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisionsof the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A,Tax Conventions, and Subpart B, Legislation and RelatedCommittee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts and Sub-parts. Also included in this part are Bank Secrecy Act Admin-istrative Rulings. Bank Secrecy Act Administrative Rulingsare issued by the Department of the Treasury’s Office of theAssistant Secretary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative indexfor the matters published during the preceding months.These monthly indexes are cumulated on a semiannual basis,and are published in the first Bulletin of the succeeding semi-annual period, respectively.

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Provide America’s taxpayers top quality service by help-ing them understand and meet their tax responsibilities

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Introduction

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

1999–52 I.R.B. 701 December 27, 1999

Section 368.—Definitions Relatingto Corporate Reorganizations

26 CFR 1.368–1(e): Continuity of interest.

Continuity of interest on repurchaseof issuer’s shares.This ruling holds thatan open market repurchase of sharesthrough a broker has no effect on continu-ity of interest in a potential reorganiza-tion.

Rev. Rul. 99-58

ISSUE

What is the effect on continuity of in-terest when a potential reorganization isfollowed by an open market reacquisitionof P’s stock?

FACTS

T merges into P, a corporation whosestock is widely held, and is publicly andactively traded. P has one class of com-mon stock authorized and outstanding. Inthe merger, T shareholders receive 50 per-cent common stock of P and 50 percentcash. Viewed in isolation, the exchangewould satisfy the continuity of interest re-quirement of § 1.368-1(e) of the IncomeTax Regulations. However, in an effort toprevent dilution resulting from the is-suance of P shares in the merger, P’s pre-existing stock repurchase program ismodified to enable P to reacquire a num-ber of its shares equal to the number is-sued in the acquisition of T. The numberof shares repurchased will not exceed thetotal number of P shares issued and out-standing prior to the merger. The repur-chases are made following the merger, onthe open market, through a broker for theprevailing market price. P’s intention torepurchase shares was announced prior tothe T merger, but the repurchase programwas not a matter negotiated with T or theT shareholders. There was not an under-standing between the T shareholders andP that the T shareholders’ ownership of Pstock would be transitory. Because of themechanics of an open market purchase, Pdoes not know the identity of a seller of Pstock, nor does a former T shareholderwho receives P stock in the merger and

subsequently sells it know whether P isthe buyer. Without regard to the repur-chase program, a market exists for thenewly-issued P stock held by the former Tshareholders. During the time P under-takes its repurchase program, there aresales of P stock on the open market,which may include sales of P shares byformer T shareholders.

LAW AND ANALYSIS

Requisite to a reorganization under theInternal Revenue Code is a continuity ofinterest as described in § 1.368–1(e).Section 1.368–1(b). The general purposeof the continuity of interest requirement is“to prevent transactions that resemblesales from qualifying for nonrecognitionof gain or loss available to corporate reor-ganizations.” Section 1.368–1(e)(1)(i).To achieve this purpose, the regulationprovides that a proprietary interest in thetarget corporation is not preserved to theextent that, “in connection with the poten-tial reorganization, . . . stock of the issu-ing corporation furnished in exchange fora proprietary interest in the target corpo-ration in the potential reorganization is re-deemed.” Id. However, for purposes ofthe continuity requirement, “a mere dis-position of stock of the issuing corpora-tion received in the potential reorganiza-tion to persons not related . . . to theissuing corporation is disregarded.” Id.The regulation provides that all facts andcircumstances will be considered in deter-mining whether, in substance, a propri-etary interest in the target corporation ispreserved.

Under the facts set forth above, conti-nuity of interest is satisfied. There wasnot an understanding between the Tshareholders and P that the T sharehold-ers’ ownership of the P shares would betransitory. Further, because of the me-chanics of an open market repurchase, therepurchase program does not favor partic-ipation by the former T shareholders.Therefore, even if it could be establishedthat P has repurchased P shares from for-mer T shareholders in the repurchase pro-gram, any such purchase would be coinci-dental. The merger and the stockrepurchase together in substance wouldnot resemble a sale of T stock to P by the

former T shareholders and, thus, the re-purchase would not be treated as “in con-nection with” the merger. Under the factspresented, a sale of P stock on the openmarket by a former T shareholder duringthe repurchase program will have the sameeffect on continuity of interest as a meredisposition to persons not related to P.

HOLDING

Under the facts presented, the openmarket repurchase of shares through abroker has no effect on continuity of in-terest in the potential reorganization.

DRAFTING INFORMATION

The principal author of this revenueruling is Marie C. Milnes-Vasquez of theOffice of Assistant Chief Counsel (Corpo-rate). For further information regardingthis revenue ruling, contact Ms. Milnes-Vasquez on (202) 622-7770 (not a toll-free call).

Section 743.—OptionalAdjustment to Basis ofPartnership Property

26 CFR 1.743-1: Optional adjustment to basis ofpartnership property.

T.D. 8847

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 1 and 602

Adjustments Following Sales of Part-nership InterestsAGENCY: Internal Revenue Service(IRS), Treasury.ACTION: Final Regulations.SUMMARY: This document finalizesregulations relating to the optional adjust-ments to the basis of partnership propertyfollowing certain transfers of partnershipinterests under section 743, the calcula-tion of gain or loss under section 751(a)following the sale or exchange of a part-nership interest, the allocation of basis ad-justments among partnership assets undersection 755, the allocation of a partner’sbasis in its partnership interest to proper-

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

December 27, 1999 702 1999–52 I.R.B.December 27, 1999 702 1999–52 I.R.B.

ties distributed to the partner by the part-nership under section 732(c), and thecomputation of a partner’s proportionateshare of the adjusted basis of depreciableproperty (or depreciable real property)under section 1017. The changes will af-fect partnerships and partners where thereare transfers of partnership interests, dis-tributions of property, or elections undersections 108(b)(5) or (c). In addition, thefinal regulations under section 732(c) re-flect changes to the law made by the Tax-payer Relief Act of 1997. DATES: Effective Dates: These regula-tions are effective December 15, 1999.Applicability Date: These regulationsapply to transfers of partnership interestsand distributions occurring on or after De-cember 15, 1999.FOR FURTHER INFORMATION CON-TACT: Matthew Lay, (202) 622-3050.SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information in thesefinal regulations have been reviewed andapproved by theOffice of Managementand Budget in accordance with the Pa-perwork Reduction Act (44 U.S.C. 3507)under control number 1545-1588. Re-sponses to these collections of informa-tion are mandatory for partnerships thathave made an election under section 754and for which a section 743 transfer hasbeen made, and for partnerships whichdistribute property in a transaction subjectto section 732(d).

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

The estimated annual burden per re-spondent varies from 1 hour to 300 hours,depending on the individual circum-stances, with an estimated average of 4hours.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be sent to theInternal Revenue Service, Attn: IRS Re-ports Clearance Officer, OP:FS:FP, Wash-ington, DC 20224, and to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-

tory Affairs, Washington, DC 20503.Books or records relating to these col-

lections of information must be retainedas long as their contents may become ma-terial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

This document (a) revises §§1.743-1and 1.755-1 of the Income Tax Regula-tions (26 CFR part 1), and (b) amends§§1.732-1, 1.732-2, 1.734-1, 1.751-1,1.754-1, and §1.1017-1 of the Income TaxRegulations.

On January 29, 1998, proposed regula-tions (REG 209682-94) were published inthe Federal Register (63 FR 4408).Written comments were received in re-sponse to the notice of proposed rulemak-ing. One speaker provided testimony at apublic hearing held on September 10,1998.

After consideration of all the com-ments, the proposed regulations undersections 732, 734, 743, 751, 755, and1017 are adopted, as revised by this Trea-sury Decision.

Explanation of Revisions andSummary of Contents

1. Basis in Distributed Property

(a) Mandatory application of section732(d). Section 1.732-1(d)(4) of the cur-rent regulations requires transferees toapply the special basis rule in certaincases. In the preamble to the proposedregulations, the IRS and the Treasury De-partment requested comments on theproper scope of section 732(d), andspecifically, under what circumstances, ifany, the Secretary should continue to ex-ercise his authority to mandate the appli-cation of section 732(d) to a transferee.Several commentators suggested that themandatory application of section 732(d)no longer should be required, because thechanges made to section 732(c) by theTaxpayer Relief Act of 1997, Public Law105-34, 111 Stat. 788, 945-46 (1997),make the distortions targeted by the regu-lations less likely to occur. However,other commentators noted that distortions

caused by section 732(c) still may occur.Accordingly, the rule contained in§1.732-1(d)(4), which requires themandatory application of section 732(d)in certain cases, remains in effect.

(b) Statement required by partnership.Because partners, rather than partner-ships, are required to report basis adjust-ments under section 732(d), the final reg-ulations require partnerships to providetransferees with such information as isnecessary for the transferees properly tocompute basis adjustments made undersection 732(d). This information must beprovided if a transferee notifies a partner-ship that it plans to make the electionunder section 732(d) or if a partnershipmakes a distribution subject to the manda-tory application of section 732(d).

(c) Effective date. One commentatorasked for clarification regarding the appli-cation of the final regulations to section732(d) adjustments. If section 732(d) ap-plies to a distribution, it is necessary tocalculate the basis adjustments whichwould have been required under section743(b) if a section 754 election were ineffect for the partnership in the taxableyear in which the partnership interest wastransferred to the partner. In calculatingthese basis adjustments, the partnershipshould apply the final regulations undersection 743 and 755 if the distribution towhich section 732(d) applies occurs afterDecember 15, 1999.2. Basis Adjustments Under Section743(b)

(a) Coordination with section 704(c).Where a partnership adopts the remedialallocation method, the proposed regula-tions provide that the section 704(c) built-in gain portion of a basis adjustmentunder section 743(b) shall be recoveredover the remaining cost recovery periodfor the section 704(c) built-in gain. Somecommentators suggested that the finalregulations should provide this treatmentfor the section 704(c) built-in gain portionof the adjustment regardless of themethod elected by the partnership for al-locating section 704(c) built-in gain andloss. The IRS and the Treasury Depart-ment continue to believe that, except forpartnerships which adopt the remedial al-location method, it is appropriate for sec-

1999–52 I.R.B. 703 December 27, 1999

tions 704(c) and 743(b) to operate inde-pendently. Accordingly, this change hasnot been adopted.

In the preamble to the proposed regula-tions, comments were requested concern-ing the application of the remedial alloca-tion method to contributed propertywhere there are no distortions caused bythe ceiling rule at the time the propertywas contributed to the partnership. Evenif it is not clear that the ceiling rule willapply at the time the property is con-tributed because the adjusted basis of thecontributed property is sufficient so thatthe non-contributing partners will be allo-cated their appropriate share of deprecia-tion or amortization attributable to theproperty, the partnership’s adoption of theremedial method still may be relevant dueto allocations resulting from a subsequentdisposition of the property. For instance,suppose that partners A and B form a part-nership and agree that each partner will beallocated a 50 percent share of all partner-ship items, and that the partnership willmake allocations under section 704(c)using the traditional method. A con-tributes depreciable property with an ad-justed tax basis of $40 and a book valueof $50, and B contributes $50 in cash. Atthe time of the contribution, it is not read-ily apparent that the ceiling rule will haveany application. However, if, before anyfederal income tax depreciation accrueswith respect to the contributed property,the property’s value declines to $40, andthe property is sold for that amount, therewill be no tax gain or loss. The book lossof $10 would be shared equally betweenA and B. In this situation, the ceiling rulewould prevent B from being allocated the$5 tax loss to which it otherwise would beentitled. However, if the partnershipelected to use the remedial method withrespect to the contributed property, Bwould be allocated a $5 tax loss, and Awould be allocated a corresponding $5 taxgain. In addition, if a contributing partnertransfers its interest in a partnership dur-ing a period when a section 754 electionis in effect, the section 704(c) methodadopted by the partnership will determinethe recovery period for the built-in gainportion of the transferee’s section 743(b)adjustment. The IRS and the TreasuryDepartment believe that under the currentregulations under section 704(c), a part-nership may use the remedial method

under §1.704-3, even where it is not read-ily apparent at the time the property iscontributed that the ceiling rule will beapplicable.

(b) Previously taxed capital. One com-mentator suggested that the second sen-tence in proposed §1.743-1(d)(2), relatingto the correlation between a partner’s in-terest in previously taxed capital and thepartnership’s capital accounts, is redun-dant and should be deleted. This sugges-tion has been adopted; however, no sub-stantive change is intended by thedeletion.

(c) Common basis election. Somecommentators suggested that the provi-sion in the proposed regulations that per-mitted the partners to elect to apply nega-tive basis adjustments under section743(b) to the partnership’s common basisshould be deleted. The commentators ar-gued that the provision was contrary tothe purpose of section 743(b), because itpermitted basis adjustments under section743(b) to affect nontransferring partners.The commentators also argued that theprovision would be used by a small num-ber of partnerships and would add unnec-essary complexity to the regulations. Inresponse to these suggestions, the provi-sion that permitted the partners to elect toapply negative basis adjustments undersection 743(b) to the partnership’s com-mon basis has been deleted.

(d) Statements by partners. Some com-mentators suggested modifying the state-ments which partners are required to pro-vide to the partnership in the case oftransfers which result in basis adjustmentsunder section 743(b). Many of these sug-gestions have been adopted. For exam-ple, the regulations specify that the trans-feree of a partnership interest is requiredto provide the name, address, and tax-payer identification number of the trans-feror only if that information is ascertain-able by the transferee. The regulationsalso specify that if a partnership interest istransferred to a nominee which is requiredto furnish the statement under §1.6031(c)-1T to the partnership, the nominee maysatisfy the notice requirements of both thesection 743 and 6031 regulations by pro-viding a single statement with respect tothat transfer, but only if the statement sat-isfies all requirements of both regulations.

The regulations require the transfereeto sign the statement under penalties of

perjury, and require the transferee to pro-vide the amount of any liabilities assumedor taken subject to by the transferee, andany other information necessary for thepartnership to compute the transferee’sbasis in the partnership interest. In orderto assist the partnership in properly calcu-lating depreciation and amortization de-ductions which may be subject to anti-churning provisions, the regulationsrequire the transferee to describe its rela-tionship, if any, to the transferor. Finally,the statement required by a transferee thatacquires an interest by death must includethe date of the decedent’s death.

One commentator suggested that thestatement required by a transferee that ac-quires a partnership interest by sale or ex-change should be provided within 30 daysof the sale or exchange, regardless ofwhether or not the transfer occurs at theend of the calendar year. This change hasbeen adopted.

One commentator suggested that refer-ences to the tax matters partner in §1.743-1(k) of the proposed regulations (regard-ing the partnership’s obligations where apartner’s statement is clearly erroneous,or a partner fails to notify the partnershipthat an interest has been transferred andthe partnership has actual knowledge ofthe transfer) should be changed. Thiscommentator emphasized that while thetax matters partner has a specialized rolewith respect to consolidated administra-tive and judicial proceedings to determinethe tax treatment of partnership items atthe partnership level, the tax matters part-ner does not have any special responsibil-ities with respect to federal income tax re-porting. The final regulations adopt thiscomment. Section 1.743-1(k) now refersto partners who are responsible for federalincome tax reporting by the partnership.

(e) Oil and gas. One commentator sug-gested that the example described in§1.743-1(j)(6) should be changed to de-scribe a non- oil and gas property. Thischange has been made. The commentatoralso suggested that in the case of domesticoil and gas properties that are depleted atthe partner level, the transferee partner(rather than the partnership) should be re-quired to make and allocate basis adjust-ments among such properties. The finalregulations adopt this comment.

The same commentator suggested thatthe regulations should specify a method

for adjusting the basis of section613A(c)(7)(D) properties in order to ac-count for percentage depletion made by apartner with respect to such properties.Under the principles of §1.743-1(j), per-centage depletion should reduce first anycarryover basis under §1.613A-3(e)(6)(iv). After the carryover basis hasbeen recovered, any further percentagedepletion should reduce the section 743adjustment for the property.3. Sales of Partnership Interests

One commentator suggested that refer-ences to fair market value should specifywhether fair market value is determinedtaking into account section 7701(g),which generally provides that fair marketvalue shall be treated as being not lessthan the amount of any nonrecourse in-debtedness to which the property is sub-ject. The regulations specify that for pur-poses of the hypothetical sale employedto determine the income or loss realizedby a partner upon the sale or exchange ofits interest in section 751 property, fairmarket value is determined taking into ac-count section 7701(g). Basis adjustmentsunder section 743(b) also are allocated byreference to a hypothetical transaction.The IRS and the Treasury Department in-tend to issue guidance in the near futurewhich will provide rules for determiningthe fair market value of partnership assetsin certain situations, including for pur-poses of allocating section 743(b) basisadjustments upon the transfer of a part-nership interest. The IRS and the Trea-sury Department anticipate that the guid-ance will provide that section 7701(g)will apply in determining the fair marketvalue of partnership assets for purposes ofallocating section 743(b) basis adjust-ments.

One commentator suggested that wherea partnership interest is sold or ex-changed, the transferor and the transfereeof a partnership interest should be permit-ted jointly to assign values to partnershipassets in a written agreement. Becausethis approach is inconsistent with the hy-pothetical sale approach of the regula-tions, this suggestion has not beenadopted.4. Elections Under Section 754

One commentator requested that part-nerships be granted a one-time right to re-voke section 754 elections in effect forsuch partnerships. Given the significant

changes to the rules made by these finalregulations as compared to the regulationsthat were in effect at the time that section754 elections previously were made, theIRS and Treasury believe that it is appro-priate to provide for a one-time revoca-tion of such elections. Accordingly, apartnership having an election in effectunder section 754 for its taxable year thatincludes December 15, 1999 may revokesuch election by attaching a statement tothe partnership’s return for that year. Thereturn must be filed on or before the duedate (including extensions) for the returnfor that year.5. Allocation of Basis Adjustments AmongPartnership Assets(a) Income in respect of a decedent.

One commentator requested that the finalregulations illustrate the allocation ofbasis adjustments among partnership as-sets where one or more of such assets rep-resents income in respect of a decedent.Where a partnership interest is transferredas a result of the death of a partner, undersection 1014(c) the transferee’s basis inits partnership interest is not adjusted forthat portion of the interest, if any, which isattributable to items representing incomein respect of a decedent under section691. Because the transferee’s basis in itspartnership interest does not include thevalue of assets which represent income inrespect of a decedent, the section 743(b)adjustment likewise does not reflect thevalue of such assets. George EdwardQuick’s Trust, 54 TC 1336 (1970) (acq.),aff ’d per curiam, 444 F.2d 90 (8th Cir.1971); Chrissie H. Woodhall, 28 T.C.M.1438 (1969), aff ’d, 454 F.2d 226 (9th Cir.1972); Rev. Rul. 66-325, 1966-2 C.B.249. Where a partnership holds assetsthat represent income in respect of a dece-dent, the section 743(b) adjustmentshould be allocated solely to other assets.Accordingly, the final regulations providethat if a partnership interest is transferredas a result of the death of a partner, andthe partnership holds assets representingincome in respect of a decedent, no partof the basis adjustment under section743(b) is allocated to these assets.

(b) Transferred basis transactions. Onecommentator called for a revised systemfor allocating basis adjustments undersection 743(b) which are triggered by ex-changes in which the transferee’s basis inthe interest is determined in whole or in

part by reference to the transferor’s basisin the interest. In many such cases, thenet section 743(b) adjustment will bezero. However, a positive or negativesection 743(b) adjustment may result, be-cause the transferee’s basis in the interestmay not be equal to the transferee’s shareof the partnership’s bases in its assets.

The IRS and the Treasury Departmentbelieve that, although these transferredbasis transactions involve transfers whichare subject to section 743(b), the new,comprehensive basis allocation rules inthe proposed regulations should not beavailable. For example, where a partner-ship interest is contributed to a corpora-tion in a transaction to which section 351applies, or to a partnership in a transac-tion to which section 721(a) applies, thetransferor merely has changed the form ofits investment. If the allocation ruleswhich apply to other section 743(b) trans-fers were applied to these exchanges, thenpartners could use these exchanges toshift basis from capital gain assets to ordi-nary income assets, or vice versa.

Therefore, the final regulations containspecial basis allocation rules for trans-ferred basis exchanges. The special rulesgenerally are modeled on the rules for al-locating basis adjustments under section734(b). The final regulations do not con-tain a specific anti-abuse rule regardingthe special basis allocation rules whichare applicable to such transfers. How-ever, there may be situations where tax-payers will attempt to undertake abusivetransactions using these special rules. Forinstance, a partner could acquire a part-nership interest during a year in which nosection 754 election is in effect, and then(in a related transaction) contribute theproperty to a wholly-owned corporationin order to take advantage of the basis al-location rules applicable to transferredbasis exchanges. In appropriate situa-tions, the IRS may attack such abusivetransactions under a variety of judicialdoctrines, including substance over formor step transaction, or under §1.701-2 ofthe regulations.

(c) Unrealized receivables under sec-tion 751(c). One commentator requestedthat the final regulations illustrate the ef-fect of depreciation recapture on the allo-cation of basis adjustments among part-nership assets under section 755. Forpurposes of this section, the final regula-

December 27, 1999 704 1999–52 I.R.B.

tions treat depreciation recapture, and anyother properties or potential gain treatedas unrealized receivables under section751(c) and the regulations thereunder, asseparate assets that are ordinary incomeproperty.

(d) Special rules for securities partner-ships and tiered partnerships. One com-mentator suggested that the regulationspermit securities partnerships to allocatebasis adjustments among partnership as-sets using an aggregation method. An-other commentator requested that the reg-ulations clarify how the regulations wouldapply to tiered partnerships. The IRS andthe Treasury Department believe that amethod for allocating basis adjustmentsamong partnership assets on an aggregatebasis is not consistent with the hypotheti-cal sale of individual assets, which is re-quired by the regulations. In addition, theIRS and Treasury Department believe thatspecial rules for tiered partnerships wouldmake the regulations more complex.Therefore, these changes have not beenadopted.6. Other Comments

One commentator suggested that forpurposes of allocating basis adjustmentsamong partnership assets, the values of allpartnership assets should be determinedby reference to the basis of the transfereeor distributee partner in its partnership in-terest. This suggestion is being consid-ered in connection with a separate projectcurrently under review by the IRS and theTreasury Department.

One commentator suggested that thelanguage of section 743 does not autho-rize regulations that permit both positiveand negative adjustments as part of thesame transaction. The IRS and the Trea-sury Department continue to believe thatthis aspect of the regulations is within theIRS’s authority to administer sections 743and 755.

Special Analyses

It has been determined that these finalregulations are not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has been deter-mined that a final regulatory flexibilityanalysis is required for the collection ofinformation in this Treasury decisionunder 5 U.S.C. 604. This analysis is set

forth below under the heading “FinalRegulatory Flexibility Act Analysis.”Pursuant to section 7805(f) of the InternalRevenue Code, the notice of proposedrulemaking preceding these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall business. No comments were re-ceived regarding the impact of the regula-tions on small business.

Final Regulatory Flexibility ActAnalysis

This analysis is required under the Reg-ulatory Flexibility Act (5 U.S.C. chapter6). In general, the regulations require atransferee that acquires an interest in apartnership with an election under section754 in effect to notify the partnership ofthe transfer. This notification must in-clude the name and taxpayer identifica-tion number of the transferee and thetransferee’s basis in the acquired partner-ship interest. The partnership is requiredto include a statement with its Form 1065,U.S. Partnership Return of Income, forthe taxable year in which the partnershipacquires knowledge of the transfer. Thisstatement must identify the name and tax-payer identification number of the trans-feree, the computation of the basis adjust-ment, and the allocation of thatadjustment to partnership properties.These requirements will ensure that thepartnership has notice that a transfer hasoccurred and that the proper basis adjust-ments are computed. The legal basis forthese requirements is contained in sec-tions 743(b), 6001, and 7805(a).

If an interest is transferred in a partner-ship holding domestic oil and gas proper-ties that are depleted at the partner levelunder 613A(c)(7)(D), the regulations re-quire the transferee partner (rather thanthe partnership) to make and allocatebasis adjustments under section 743(b)among such properties.

There were approximately 1,494,000partnerships in 1994. However, theseregulations apply only to partnerships thathave made an election under section 754.The election under section 754 is gener-ally not made unless there has been atransfer of a partnership interest or a dis-tribution by the partnership. Moreover,the effects of the election attach to spe-

cific items of partnership property andmay provide only temporary benefits forthe partners. Except for the one-time re-vocation which is allowed in connectionwith the promulgation of these final regu-lations, the election cannot be revokedwithout the consent of the Secretary. TheIRS and the Treasury Department believethat most partnerships do not make theelection under section 754. Therefore,most partnerships will not be affected bythe regulations in any given year.

After a partner conveys information tothe partnership concerning a transfer of apartnership interest, the partnership mustadjust the partner’s interest in the basis ofpartnership property. Because these basisadjustments will affect the partner’s shareof depreciation or amortization deduc-tions and amounts of gain or loss on thedisposition of certain items of partnershipproperty, the partnership must prepareand maintain special entries on its books.However, in many cases, partnership re-turns are prepared using computer soft-ware that can prepare and maintain thesespecial entries after the initial year.

The IRS and the Treasury Departmentare not aware of any federal rules thatmay duplicate, overlap, or conflict withthe rule.

As an alternative to the disclosure de-scribed above, the IRS and the TreasuryDepartment considered, but rejected, arule that would have required the part-ners, and not the partnerships, to make thebasis adjustments and to determine the ef-fects of the basis adjustments on the part-ners’ distributive shares. This alternativewas rejected because the IRS and theTreasury Department believe that partner-ships generally have better access to theinformation necessary to report section743 basis adjustments properly. To re-quire the partners rather than the partner-ships to bear the burden of reportingwould require the partnerships to providethe partners with significant amounts ofinformation not otherwise needed by thepartners. There are no known alternativerules that are less burdensome to the part-nerships and their partners but that ac-complish the purpose of the statute.

Finally, because partners, rather thanpartnerships, are required to report basisadjustments under section 732(d), thefinal regulations require partnerships toprovide transferees with such information

1999–52 I.R.B. 705 December 27, 1999

as is necessary for the transferees prop-erly to compute basis adjustments madeunder section 732(d). This informationmust be provided if a transferee notifies apartnership that it plans to make the elec-tion under section 732(d) or if a partner-ship makes a distribution subject to themandatory application of section 732(d).The IRS and the Treasury Department be-lieve that this requirement will applyunder limited circumstances to a smallpercentage of partnerships.

Drafting Information

The principal author of these regulationsis Matthew Lay of the Office of the Assis-tant Chief Counsel (Passthroughs and Spe-cial Industries). However, other personnelfrom the IRS and the Treasury Departmentparticipated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 602are ammended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding entries in nu-merical order to read as follows:Authority: 26 U.S.C. 7805 * * *Section 1.732-1 also issued under 26U.S.C. 732. Section 1.732-2 also issued under 26U.S.C. 732. Section 1.734-1 also issued under 26U.S.C. 734. Section 1.743-1 also issued under 26U.S.C. 743. Section 1.751-1 also issued under 26U.S.C. 751. Section 1.755-1 also issued under 26U.S.C. 755. * * *Section 1.1017-1 also issued under 26U.S.C. 1017. * * *

Par. 2. Section 1.732-1 is amended asfollows:

1. Revise paragraph (c).2. Revise paragraph (d)(1)(ii).3. Revise the last sentence of paragraph

(d)(1)(v).4. Revise paragraph (d)(1)(vi).5. Revise paragraph (d)(4)(iii).6. Remove the flush text and Examples

1 and 2 following paragraph (d)(4)(iii).

7. Add paragraph (d)(5).The additions and revisions read as fol-

lows:§1.732-1 Basis of distributed propertyother than money.* * * * *

(c) Allocation of basis among prop-erties distributed to a partner—(1)General rule—(i) Unrealized receiv-ables and inventory items. The basis tobe allocated to properties distributed toa partner under section 732(a)(2) or (b)is allocated first to any unrealized re-ceivables (as defined in section 751(c))and inventory items (as defined in sec-tion 751(d)(2)) in an amount equal tothe adjusted basis of each such propertyto the partnership immediately beforethe distribution. If the basis to be allo-cated is less than the sum of the ad-justed bases to the partnership of thedistributed unrealized receivables andinventory items, the adjusted basis ofthe distributed property must be de-creased in the manner provided in para-graph (c)(2)(i) of this section.

(ii) Other distributed property. Anybasis not allocated to unrealized receiv-ables or inventory items under para-graph (c)(1)(i) of this section is allo-cated to any other property distributedto the partner in the same transactionby assigning to each distributed prop-erty an amount equal to the adjustedbasis of the property to the partnershipimmediately before the distribution.However, if the sum of the adjustedbases to the partnership of such otherdistributed property does not equal thebasis to be allocated among the distrib-uted property, any increase or decreaserequired to make the amounts equal isallocated among the distributed prop-erty as provided in paragraph (c)(2) ofthis section.

(2) Adjustment to basis allocation—(i) Decrease in basis. Any decrease tothe basis of distributed property re-quired under paragraph (c)(1) of thissection is allocated first to distributedproperty with unrealized depreciationin proportion to each property’s respec-tive amount of unrealized depreciationbefore any decrease (but only to the ex-tent of each property’s unrealized de-preciation). If the required decreaseexceeds the amount of unrealized de-preciation in the distributed property,

the excess is allocated to the distributedproperty in proportion to the adjustedbases of the distributed property, as ad-justed pursuant to the immediately pre-ceding sentence.

(ii) Increase in basis. Any increaseto the basis of distributed property re-quired under paragraph (c)(1)(ii) of thissection is allocated first to distributedproperty (other than unrealized receiv-ables and inventory items) with unreal-ized appreciation in proportion to eachproperty’s respective amount of unreal-ized appreciation before any increase(but only to the extent of each prop-erty’s unrealized appreciation). If therequired increase exceeds the amountof unrealized appreciation in the dis-tributed property, the excess is allo-cated to the distributed property (otherthan unrealized receivables or inven-tory items) in proportion to the fairmarket value of the distributed prop-erty.

(3) Unrealized receivables and in-ventory items. If the basis to be allo-cated upon a distribution in liquidationof the partner’s entire interest in thepartnership is greater than the adjustedbasis to the partnership of the unreal-ized receivables and inventory itemsdistributed to the partner, and if there isno other property distributed to whichthe excess can be allocated, the distrib-utee partner sustains a capital lossunder section 731(a)(2) to the extent ofthe unallocated basis of the partnershipinterest.

(4) Examples. The provisions of thisparagraph (c) are illustrated by the fol-lowing examples:

Example 1. A is a one-fourth partner in partner-

ship PRS and has an adjusted basis in its partnership

interest of $650. PRS distributes inventory items

and Assets X and Y to A in liquidation of A’s entire

partnership interest. The distributed inventory items

have a basis to the partnership of $100 and a fair

market value of $200. Asset X has an adjusted basis

to the partnership of $50 and a fair market value of

$400. Asset Y has an adjusted basis to the partner-

ship and a fair market value of $100. Neither Asset

X nor Asset Y consists of inventory items or unreal-

ized receivables. Under this paragraph (c), A’s basis

in its partnership interest is allocated first to the in-

ventory items in an amount equal to their adjusted

basis to the partnership. A, therefore, has an ad-

justed basis in the inventory items of $100. The re-

maining basis, $550, is allocated to the distributed

December 27, 1999 706 1999–52 I.R.B.

property first in an amount equal to the property’s

adjusted basis to the partnership. Thus, Asset X is

allocated $50 and Asset Y is allocated $100. Asset

X is then allocated $350, the amount of unrealized

appreciation in Asset X. Finally, the remaining

basis, $50, is allocated to Assets X and Y in propor-

tion to their fair market values: $40 to Asset X

(400/500 x $50), and $10 to Asset Y (100/500 x

$50). Therefore, after the distribution, A has an ad-

justed basis of $440 in Asset X and $110 in Asset Y.

Example 2. B is a one-fourth partner in partner-

ship PRS and has an adjusted basis in its partnership

interest of $200. PRS distributes Asset X and Asset

Y to B in liquidation of its entire partnership inter-

est. Asset X has an adjusted basis to the partnership

and fair market value of $150. Asset Y has an ad-

justed basis to the partnership of $150 and a fair

market value of $50. Neither of the assets consists

of inventory items or unrealized receivables. Under

this paragraph (c), B’s basis is first assigned to the

distributed property to the extent of the partnership’s

basis in each distributed property. Thus, Asset X

and Asset Y are each assigned $150. Because the

aggregate adjusted basis of the distributed property,

$300, exceeds the basis to be allocated, $200, a de-

crease of $100 in the basis of the distributed prop-

erty is required. Assets X and Y have unrealized de-

preciation of zero and $100, respectively. Thus, the

entire decrease is allocated to Asset Y. After the dis-

tribution, B has an adjusted basis of $150 in Asset X

and $50 in Asset Y.

Example 3. C, a partner in partnership PRS, re-

ceives a distribution in liquidation of its entire part-

nership interest of $6,000 cash, inventory items hav-

ing an adjusted basis to the partnership of $6,000,

and real property having an adjusted basis to the

partnership of $4,000. C’s basis in its partnership

interest is $9,000. The cash distribution reduces C’s

basis to $3,000, which is allocated entirely to the in-

ventory items. The real property has a zero basis in

C’s hands. The partnership bases not carried over to

C for the distributed properties are lost unless an

election under section 754 is in effect requiring the

partnership to adjust the bases of remaining partner-

ship properties under section 734(b).

Example 4. Assume the same facts as in Exam-

ple 3of this paragraph except C receives a distrib-

ution in liquidation of its entire partnership inter-

est of $1,000 cash and inventory items having a

basis to the partnership of $6,000. The cash distri-

bution reduces C’s basis to $8,000, which can be

allocated only to the extent of $6,000 to the inven-

tory items. The remaining $2,000 basis, not allo-

cable to the distributed property, constitutes a cap-

ital loss to partner C under section 731(a)(2). If

the election under section 754 is in effect, see sec-

tion 734(b) for adjustment of the basis of undis-

tributed partnership property.

(5) Effective date. This paragraph(c) applies to distributions of propertyfrom a partnership that occur on orafter December 15, 1999.

(d) * * * (1) * * *(ii) Where an election under section

754 is in effect, see section 743(b) and§§1.743-1 and 1.732-2.* * * * *

(v) * * * (For a shift of transferee’sbasis adjustment under section 743(b)to like property, see §1.743-1(g).)

(vi) The provisions of this paragraph(d)(1) may be illustrated by the follow-ing example:

Example. (i) Transferee partner, T, purchased

a one-fourth interest in partnership PRS for

$17,000. At the time T purchased the partnership

interest, the election under section 754 was not in

effect and the partnership inventory had a basis to

the partnership of $14,000 and a fair market

value of $16,000. T’s purchase price reflected

$500 of this difference. Thus, $4,000 of the

$17,000 paid by T for the partnership interest was

attributable to T’s share of partnership inventory

with a basis of $3,500. Within 2 years after T ac-

quired the partnership interest, T retired from the

partnership and received in liquidation of its en-

tire partnership interest the following property:

1999–52 I.R.B. 707 December 27, 1999

AssetsAdjusted FairBasis to Market

PRS Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1,500 . . . . . . . . . . . . . . . . . . . $1,500Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$3,500 . . . . . . . . . . . . . . . . . . . . $4,000Asset X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,000 . . . . . . . . . . . . . . . . . . . . $4,000Asset Y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$4,000 . . . . . . . . . . . . . . . . . . . . $5,000

(ii) The fair market value of the in-ventory received by T was one-fourth ofthe fair market value of all partnershipinventory and was T’s share of suchproperty. It is immaterial whether theinventory T received was on hand whenT acquired the interest. In accordancewith T’s election under section 732(d),the amount of T’s share of partnershipbasis that is attributable to partnershipinventory is increased by $500 (one-fourth of the $2,000 difference betweenthe fair market value of the property,$16,000, and its $14,000 basis to thepartnership at the time T purchased itsinterest). This adjustment under section

732(d) applies only for purposes of dis-tributions to T, and not for purposes ofpartnership depreciation, depletion, orgain or loss on disposition. Thus, theamount to be allocated among the prop-erties received by T in the liquidatingdistribution is $15,500 ($17,000, T’sbasis for the partnership interest, re-duced by the amount of cash received,$1,500). This amount is allocated asfollows: The basis of the inventoryitems received is $4,000, consisting ofthe $3,500 common partnership basis,plus the basis adjustment of $500 whichT would have had under section 743(b).The remaining basis of $11,500

($15,500 minus $4,000) is allocatedamong the remaining property distrib-uted to T by assigning to each propertythe adjusted basis to the partnership ofsuch property and adjusting that basisby any required increase or decrease.Thus, the adjusted basis to T of Asset Xis $5,111 ($2,000, the adjusted basis ofAsset X to the partnership, plus $2,000,the amount of unrealized appreciationin Asset X, plus $1,111 ($4,000/$9,000multiplied by $2,500)). Similarly, theadjusted basis of Asset Y to T is $6,389($4,000, the adjusted basis of Asset Y tothe partnership, plus $1,000, the amountof unrealized appreciation in Asset Y,

plus, $1,389 ($5,000/$9,000 multipliedby $2,500)). * * * * *(4) * * *

(iii) A basis adjustment under section743(b) would change the basis to thetransferee partner of the property actuallydistributed.

(5) Required statements. If a transfereepartner notifies a partnership that it plansto make the election under section 732(d)under paragraph (d)(3) of this section, orif a partnership makes a distribution towhich paragraph (d)(4) of this section ap-plies, the partnership must provide thetransferee with such information as isnecessary for the transferee properly tocompute the transferee’s basis adjust-ments under section 732(d). * * * * *

Par. 3. Section 1.732-2 is amended byrevising the sentence at the end of the Ex-amplein paragraph (b) to read as follows:§1.732-2 Special partnership basis of dis-tributed property.* * * * *

(b) * * *Example. * * * See §1.743-1(g).

* * * * *Par. 4. In §1.734-1, paragraph (e) is

added to read as follows:§1.734-1 Optional adjustment to basis ofundistributed partnership property.* * * * *

(e) Recovery of adjustments to basis ofpartnership property—(1) Increases inbasis. For purposes of section 168, if thebasis of a partnership’s recovery propertyis increased as a result of the distributionof property to a partner, then the increasedportion of the basis must be taken into ac-count as if it were newly-purchased re-covery property placed in service whenthe distribution occurs. Consequently,any applicable recovery period andmethod may be used to determine the re-covery allowance with respect to the in-creased portion of the basis. However, nochange is made for purposes of determin-ing the recovery allowance under section168 for the portion of the basis for whichthere is no increase.

(2) Decreases in basis. For purposes ofsection 168, if the basis of a partnership’s

recovery property is decreased as a resultof the distribution of property to a partner,then the decrease in basis must be ac-counted for over the remaining recoveryperiod of the property beginning withthe recovery period in which the basis isdecreased.

(3) Effective date. This paragraph (e)applies to distributions of property froma partnership that occur on or after De-cember 15, 1999.

Par. 5. Section 1.743-1 is revised toread as follows:

§1.743-1 Optional adjustment to basisof partnership property.

(a) Generally. The basis of partner-ship property is adjusted as a result ofthe transfer of an interest in a partner-ship by sale or exchange or on the deathof a partner only if the election providedby section 754 (relating to optional ad-justments to the basis of partnershipproperty) is in effect with respect to thepartnership. Whether or not the electionprovided in section 754 is in effect, thebasis of partnership property is not ad-justed as the result of a contribution ofproperty, including money, to the part-nership.(b) Determination of adjustment. In

the case of the transfer of an interest in apartnership, either by sale or exchangeor as a result of the death of a partner, apartnership that has an election undersection 754 in effect—

(1) Increases the adjusted basis ofpartnership property by the excess of thetransferee’s basis for the transferredpartnership interest over the transferee’sshare of the adjusted basis to the part-nership of the partnership’s property; or

(2) Decreases the adjusted basis ofpartnership property by the excess of thetransferee’s share of the adjusted basisto the partnership of the partnership’sproperty over the transferee’s basis forthe transferred partnership interest.

(c) Determination of transferee’sbasis in the transferred partnership in-terest. In the case of the transfer of apartnership interest by sale or exchangeor as a result of the death of a partner,the transferee’s basis in the transferredpartnership interest is determined under

section 742 and §1.742-1. See also sec-tion 752 and §§1.752-1 through 1.752-5.

(d) Determination of transferee’sshare of the adjusted basis to the part-nership of the partnership’s property—(1) Generally. A transferee’s share ofthe adjusted basis to the partnership ofpartnership property is equal to the sumof the transferee’s interest as a partner inthe partnership’s previously taxed capi-tal, plus the transferee’s share of part-nership liabilities. Generally, a trans-feree’s interest as a partner in thepartnership’s previously taxed capital isequal to—

(i) The amount of cash that the trans-feree would receive on a liquidation ofthe partnership following the hypotheti-cal transaction, as defined in paragraph(d)(2) of this section (to the extent at-tributable to the acquired partnership in-terest); increased by

(ii) The amount of tax loss (includingany remedial allocations under §1.704-3(d)), that would be allocated to thetransferee from the hypothetical transac-tion (to the extent attributable to the ac-quired partnership interest); and de-creased by

(iii) The amount of tax gain (includ-ing any remedial al locations under§1.704-3(d)), that would be allocated tothe transferee from the hypotheticaltransaction (to the extent attributable tothe acquired partnership interest).

(2) Hypothetical transaction defined.For purposes of paragraph (d)(1) of thissection, the hypothetical transactionmeans the disposition by the partnershipof all of the partnership’s assets, immedi-ately after the transfer of the partnershipinterest, in a fully taxable transaction forcash equal to the fair market value of theassets.

(3) Examples. The provisions of thisparagraph (d) are illustrated by the fol-lowing examples:

Example 1. (i) A is a member of partnership PRS

in which the partners have equal interests in capital

and profits. The partnership has made an election

under section 754, relating to the optional adjust-

ment to the basis of partnership property. A sells its

interest to T for $22,000. The balance sheet of the

partnership at the date of sale shows the following:

December 27, 1999 708 1999–52 I.R.B.

Liabilities and CapitalFair

Adjusted MarketPer Books Value

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $10,000 Capital:

A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 22,000B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 22,000C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 22,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000 $76,000

1999–52 I.R.B. 709 December 27, 1999

AssetsFair

Adjusted MarketBasis Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$5,000 $5,000Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000 10,000Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,000 21,000Depreciable assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,000 40,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000 $76,000

(ii) The amount of the basis adjust-ment under section 743(b) is the differ-ence between the basis of T’s interest inthe partnership and T’s share of the ad-justed basis to the partnership of thepartnership’s property. Under section742, the basis of T’s interest is $25,333(the cash paid for A’s interest, $22,000,plus $3,333, T’s share of partnership lia-bilities). T’s interest in the partnership’spreviously taxed capital is $15,000($22,000, the amount of cash T wouldreceive if PRS liquidated immediatelyafter the hypothetical transaction, de-creased by $7,000, the amount of taxgain allocated to T from the hypotheticaltransaction). T’s share of the adjustedbasis to the partnership of the partner-ship’s property is $18,333 ($15,000share of previously taxed capital, plus$3,333 share of the partnership’s liabili-ties). The amount of the basis adjust-ment under section 743(b) to partnershipproperty therefore, is $7,000, the differ-ence between $25,333 and $18,333.

Example 2. A, B, and C form partnership PRS,

to which A contributes land (Asset 1) with a fair

market value of $1,000 and an adjusted basis to A

of $400, and B and C each contribute $1,000 cash.

Each partner has $1,000 credited to it on the books

of the partnership as its capital contribution. The

partners share in profits equally. During the part-

nership’s first taxable year, Asset 1 appreciates in

value to $1,300. A sells its one-third interest in the

partnership to T for $1,100, when an election under

section 754 is in effect. The amount of tax gain

that would be allocated to T from the hypothetical

transaction is $700 ($600 section 704(c) built-in

gain, plus one-third of the additional gain). Thus,

T’s interest in the partnership’s previously taxed

capital is $400 ($1,100, the amount of cash T

would receive if PRS liquidated immediately after

the hypothetical transaction, decreased by $700,

T’s share of gain from the hypothetical transac-

tion). The amount of T’s basis adjustment under

section 743(b) to partnership property is $700 (the

excess of $1,100, T’s cost basis for its interest, over

$400, T’s share of the adjusted basis to the partner-

ship of partnership property).

(e) Allocation of basis adjustment. Forthe allocation of the basis adjustmentunder this section among the individualitems of partnership property, see section755 and the regulations thereunder.

(f) Subsequent transfers. Where therehas been more than one transfer of a part-nership interest, a transferee’s basis ad-justment is determined without regard toany prior transferee’s basis adjustment.In the case of a gift of an interest in a part-nership, the donor is treated as transfer-ring, and the donee as receiving, that por-tion of the basis adjustment attributable tothe gifted partnership interest. The provi-sions of this paragraph (f) are illustratedby the following example:

Example. (i) A, B, and C form partnership PRS.

A and B each contribute $1,000 cash, and C con-

tributes land with a basis and fair market value of

$1,000. When the land has appreciated in value to

$1,300, A sells its interest to T1 for $1,100 (one-

third of $3,300, the fair market value of the partner-

ship property). An election under section 754 is in

effect; therefore, T1 has a basis adjustment under

section 743(b) of $100.

(ii) After the land has further appreci-ated in value to $1,600, T1 sells its inter-est to T2 for $1,200 (one-third of $3,600,the fair market value of the partnershipproperty). T2 has a basis adjustmentunder section 743(b) of $200. Thisamount is determined without regard toany basis adjustment under section 743(b)that T1 may have had in the partnershipassets.

(iii) During the following year, T2makes a gift to T3 of fifty percent ofT2’s interest in PRS. At the time of thetransfer, T2 has a $200 basis adjustmentunder section 743(b). T2 is treated astransferring $100 of the basis adjust-ment to T3 with the gift of the partner-ship interest.

(g) Distributions—(1) Distribution ofadjusted property to the transferee—(i)Coordination with section 732. If a part-nership distributes property to a transfereeand the transferee has a basis adjustmentfor the property, the basis adjustment istaken into account under section 732. See§1.732-2(b).

(ii) Coordination with section 734. Forcertain adjustments to the common basisof remaining partnership property afterthe distribution of adjusted property to atransferee, see §1.734-2(b).

(2) Distribution of adjusted property toanother partner— (i) Coordination withsection 732. If a partner receives a distri-bution of property with respect to whichanother partner has a basis adjustment,the distributee does not take the basis ad-justment into account under section 732.

(ii) Reallocation of basis.A transfereewith a basis adjustment in property that isdistributed to another partner reallocatesthe basis adjustment among the remaining

items of partnership property under§1.755-1(c).

(3) Distributions in complete liquida-tion of a partner’s interest. If a transfereereceives a distribution of property(whether or not the transferee has a basisadjustment in such property) in liquida-tion of its interest in the partnership, theadjusted basis to the partnership of thedistributed property immediately beforethe distribution includes the transferee’sbasis adjustment for the property in whichthe transferee relinquished an interest (ei-ther because it remained in the partner-ship or was distributed to another part-ner). Any basis adjustment for property

in which the transferee is deemed to relin-quish its interest is reallocated among theproperties distributed to the transfereeunder §1.755-1(c).

(4) Coordination with other provisions.The rules of sections 704(c)(1)(B), 731,737, and 751 apply before the rules of thisparagraph (g).

(5) Example. The provisions of thisparagraph (g) are illustrated by the fol-lowing example:

Example. (i) A, B, and C are equal partners inpartnership PRS. Each partner originally con-tributed $10,000 in cash, and PRS used the contribu-tions to purchase five nondepreciable capital assets.PRS has no liabilities. After five years, PRS’s bal-ance sheet appears as follows:

December 27, 1999 710 1999–52 I.R.B.

AssetsFair

Adjusted MarketBasis Value

Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $10,000Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,000 6,000Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,000 6,000Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,000 4,000Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 13,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000 $39,000

CapitalFair

Adjusted MarketPer Books Value

Partner A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $13,000Partner B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000 13,000Partner C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 13,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000 $39,000

(ii) A sells its interest to T for $13,000when PRS has an election in effect undersection 754. T receives a basis adjust-ment under section 743(b) in the partner-

ship property that is equal to $3,000 (theexcess of T’s basis in the partnership in-terest, $13,000, over T’s share of the ad-justed basis to the partnership of partner-

ship property, $10,000). The basis adjust-ment is allocated under section 755, andthe partnership’s balance sheet appears asfollows:

Assets

FairAdjusted Market Basis

Basis Value Adjustment

Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $10,000 $ 0.00Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,000 6,000 666.67Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,000 6,000 0.00Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,000 4,000 (1,000.00)Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 13,000 3,333.33

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000 $39,000 $3,000.00

Capital

FairAdjusted Market Special Per Books Value Basis

Partner T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $13,000 $3,000Partner B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000 13,000 0Partner C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 13,000 0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$30,000 $39,000 $3,000

1999–52 I.R.B. 711 December 27, 1999

(iii) Assume that PRS distributes Asset 2 to T in

partial liquidation of T’s interest in the partnership.

T has a basis adjustment under section 743(b) of

$666.67 in Asset 2. Under paragraph (g)(1)(i) of

this section, T takes the basis adjustment into ac-

count under section 732. Therefore, T will have a

basis in Asset 2 of $4,666.67 following the distribu-

tion.

(iv) Assume instead that PRS distributes Asset 5

to C in complete liquidation of C’s interest in PRS.

T has a basis adjustment under section 743(b) of

$3,333.33 in Asset 5. Under paragraph (g)(2)(i) of

this section, C does not take T’s basis adjustment

into account under section 732. Therefore, the part-

nership’s basis for purposes of sections 732 and 734

is $3,000. Under paragraph (g)(2)(ii) of this section,

T’s $3,333.33 basis adjustment is reallocated among

the remaining partnership assets under §1.755-1(c).

(v) Assume instead that PRS distributes Asset 5

to T in complete liquidation of its interest in PRS.

Under paragraph (g)(3) of this section, immediately

prior to the distribution of Asset 5 to T, PRS must

adjust the basis of Asset 5. Therefore, immediately

prior to the distribution, PRS’s basis in Asset 5 is

equal to $6,000, which is the sum of (A) $3,000,

PRS’s common basis in Asset 5, plus (B) $3,333.33,

T’s basis adjustment to Asset 5, plus (C) ($333.33),

the sum of T’s basis adjustments in Assets 2 and 4.

For purposes of sections 732 and 734, therefore,

PRS will be treated as having a basis in Asset 5

equal to $6,000.

(h) Contributions of adjusted prop-erty—(1) Section 721(a) transactions. If,in a transaction described in section721(a), a partnership (the upper tier) con-tributes to another partnership (the lowertier) property with respect to which abasis adjustment has been made, the basisadjustment is treated as contributed to thelower-tier partnership, regardless ofwhether the lower-tier partnership makesa section 754 election. The lower tier’sbasis in the contributed assets and theupper tier’s basis in the partnership inter-est received in the transaction are deter-mined with reference to the basis adjust-

ment. However, that portion of the basisof the upper tier’s interest in the lower tierattributable to the basis adjustment mustbe segregated and allocated solely to thetransferee partner for whom the basis ad-justment was made. Similarly, that por-tion of the lower tier’s basis in its assetsattributable to the basis adjustment mustbe segregated and allocated solely to theupper tier and the transferee. A partnerwith a basis adjustment in property heldby a partnership that terminates undersection 708(b)(1)(B) will continue to havethe same basis adjustment with respect toproperty deemed contributed by the ter-minated partnership to the new partner-ship under §1.708-1(b)(1)(iv), regardlessof whether the new partnership makes asection 754 election.

(2) Section 351 transactions—(i) Basisin transferred property. A corporation’sadjusted tax basis in property transferredto the corporation by a partnership in atransaction described in section 351 is de-termined with reference to any basis ad-justments to the property under section743(b) (other than any basis adjustmentthat reduces a partner’s gain under para-graph (h)(2)(ii) of this section).

(ii) Partnership gain. The amount ofgain, if any, recognized by the partnershipon a transfer of property by the partner-ship to a corporation in a transfer de-scribed in section 351 is determined with-out reference to any basis adjustment tothe transferred property under section743(b). The amount of gain, if any, rec-ognized by the partnership on the transferthat is allocated to a partner with a basisadjustment in the transferred property isadjusted to reflect the partner’s basis ad-justment in the transferred property.

(iii) Basis in stock. The partnership’sadjusted tax basis in stock received from acorporation in a transfer described in sec-tion 351 is determined without reference

to the basis adjustment in property trans-ferred to the corporation in the section351 exchange. A partner with a basis ad-justment in property transferred to thecorporation, however, has a basis adjust-ment in the stock received by the partner-ship in the section 351 exchange in anamount equal to the partner’s basis adjust-ment in the transferred property, reducedby any basis adjustment that reduced thepartner’s gain under paragraph (h)(2)(ii)of this section.

(iv) Example. The following exampleillustrates the principles of this paragraph(h):

Example. (i) A, B, and C are equal partners in

partnership PRS. The partnership’s only asset, Asset

1, has an adjusted tax basis of $60 and a fair market

value of $120. Asset 1 is a nondepreciable capital

asset and is not section 704(c) property. A has a

basis in its partnership interest of $40, and a positive

section 743(b) adjustment of $20 in Asset 1. In a

transaction to which section 351 applies, PRS con-

tributes Asset 1 to X, a corporation, in exchange for

$15 in cash and X stock with a fair market value of

$105.

(ii) Under paragraph (h)(2)(ii) of this section,

PRS realizes $60 of gain on the transfer of Asset 1 to

X ($120, its amount realized, minus $60, its adjusted

basis), but recognizes only $15 of that gain under

section 351(b)(1). Of this amount, $5 is allocated to

each partner. A must use $5 of its basis adjustment

in Asset 1 to offset A’s share of PRS’s gain. Under

paragraph (h)(2)(iii) of this section, PRS’s basis in

the stock received from X is $60. However, A has a

basis adjustment in the stock received by PRS equal

to $15 (its basis adjustment in Asset 1, $20, reduced

by the portion of the adjustment which reduced A’s

gain, $5). Under paragraph (h)(2)(i) of this section,

X’s basis in Asset 1 equals $75 (PRS’s common

basis in the asset, $60, plus A’s basis adjustment

under section 743(b), $20, less the portion of the ad-

justment which reduced A’s gain, $5).

(i) [Reserved].(j) Effect of basis adjustment—(1) In

general. The basis adjustment constitutes

an adjustment to the basis of partnershipproperty with respect to the transfereeonly. No adjustment is made to the com-mon basis of partnership property. Thus,for purposes of calculating income, de-duction, gain, and loss, the transferee willhave a special basis for those partnershipproperties the bases of which are adjustedunder section 743(b) and this section.The adjustment to the basis of partnershipproperty under section 743(b) has no ef-fect on the partnership’s computation ofany item under section 703.

(2) Computation of partner’s distribu-tive share of partnership items. The part-nership first computes its items of in-come, deduction, gain, or loss at thepartnership level under section 703. Thepartnership then allocates the partnershipitems among the partners, including thetransferee, in accordance with section704, and adjusts the partners’ capital ac-counts accordingly. The partnership thenadjusts the transferee’s distributive shareof the items of partnership income, de-duction, gain, or loss, in accordance withparagraphs (j)(3) and (4) of this section,to reflect the effects of the transferee’sbasis adjustment under section 743(b).These adjustments to the transferee’s dis-tributive shares must be reflected onSchedules K and K-1 of the partnership’sreturn (Form 1065). These adjustments tothe transferee’s distributive shares do notaffect the transferee’s capital account.

(3) Effect of basis adjustment in deter-mining items of income, gain, or loss—(i)In general. The amount of a transferee’sincome, gain, or loss from the sale or ex-change of a partnership asset in which thetransferee has a basis adjustment is equalto the transferee’s share of the partner-ship’s gain or loss from the sale of theasset (including any remedial allocationsunder §1.704-3(d)), minus the amount ofthe transferee’s positive basis adjustmentfor the partnership asset (determined bytaking into account the recovery of thebasis adjustment under paragraph(j)(4)(i)(B) of this section) or plus theamount of the transferee’s negative basisadjustment for the partnership asset (de-termined by taking into the account therecovery of the basis adjustment underparagraph (j)(4)(ii)(B) of this section).

(ii) Examples. The following examplesillustrate the principles of this paragraph(j)(3):

Example 1. A and B form equal partnership PRS.

A contributes nondepreciable property with a fair

market value of $50 and an adjusted tax basis of

$100. PRS will use the traditional allocation method

under §1.704-3(b). B contributes $50 cash. A sells

its interest to T for $50. PRS has an election in ef-

fect to adjust the basis of partnership property under

section 754. T receives a negative $50 basis adjust-

ment under section 743(b) that, under section 755, is

allocated to the nondepreciable property. PRS then

sells the property for $60. PRS recognizes a book

gain of $10 (allocated equally between T and B) and

a tax loss of $40. T will receive an allocation of $40

of tax loss under the principles of section 704(c).

However, because T has a negative $50 basis adjust-

ment in the nondepreciable property, T recognizes a

$10 gain from the partnership’s sale of the property.

Example 2. A and B form equal partnership PRS.

A contributes nondepreciable property with a fair

market value of $100 and an adjusted tax basis of

$50. B contributes $100 cash. PRS will use the tra-

ditional allocation method under §1.704-3(b). A

sells its interest to T for $100. PRS has an election

in effect to adjust the basis of partnership property

under section 754. Therefore, T receives a $50 basis

adjustment under section 743(b) that, under section

755, is allocated to the nondepreciable property.

PRS then sells the nondepreciable property for $90.

PRS recognizes a book loss of $10 (allocated

equally between T and B) and a tax gain of $40. T

will receive an allocation of the entire $40 of tax

gain under the principles of section 704(c). How-

ever, because T has a $50 basis adjustment in the

property, T recognizes a $10 loss from the partner-

ship’s sale of the property.

Example 3. A and B form equal partnership PRS.

PRS will make allocations under section 704(c)

using the remedial allocation method described in

§1.704-3(d). A contributes nondepreciable property

with a fair market value of $100 and an adjusted tax

basis of $150. B contributes $100 cash. A sells its

partnership interest to T for $100. PRS has an elec-

tion in effect to adjust the basis of partnership prop-

erty under section 754. T receives a negative $50

basis adjustment under section 743(b) that, under

section 755, is allocated to the property. The part-

nership then sells the property for $120. The part-

nership recognizes a $20 book gain and a $30 tax

loss. The book gain will be allocated equally be-

tween the partners. The entire $30 tax loss will be

allocated to T under the principles of section 704(c).

To match its $10 share of book gain, B will be allo-

cated $10 of remedial gain, and T will be allocated

an offsetting $10 of remedial loss. T was allocated a

total of $40 of tax loss with respect to the property.

However, because T has a negative $50 basis adjust-

ment to the property, T recognizes a $10 gain from

the partnership’s sale of the property.

(4) Effect of basis adjustment in deter-mining items of deduction—(i)Increases—(A) Additional deduction.The amount of any positive basis adjust-ment that is recovered by the transferee inany year is added to the transferee’s dis-tributive share of the partnership’s depre-ciation or amortization deductions for theyear. The basis adjustment is adjustedunder section 1016(a)(2) to reflect the re-covery of the basis adjustment.

(B) Recovery period—(1) In general.Except as provided in paragraph(j)(4)(i)(B)(2) of this section, for pur-poses of section 168, if the basis of apartnership’s recovery property is in-creased as a result of the transfer of apartnership interest, then the increasedportion of the basis is taken into accountas if it were newly-purchased recoveryproperty placed in service when thetransfer occurs. Consequently, any ap-plicable recovery period and methodmay be used to determine the recoveryallowance with respect to the increasedport ion of the basis. However, nochange is made for purposes of deter-mining the recovery allowance undersection 168 for the portion of the basisfor which there is no increase.

(2) Remedial allocation method. If apartnership elects to use the remedialallocation method described in §1.704-3(d) with respect to an item of the part-nership’s recovery property, then theportion of any increase in the basis ofthe item of the partnership’s recoveryproperty under section 743(b) that is at-tributable to section 704(c) built-ingain is recovered over the remainingrecovery period for the partnership’sexcess book basis in the property as de-termined in the f inal sentence of§1.704-3(d)(2). Any remaining portionof the basis increase is recovered underparagraph (j)(4)(i)(B)(1) of this sec-tion.

(C) Examples. The provisions of thisparagraph (j)(4)(i) are illustrated by thefollowing examples:

Example 1. (i) A, B, and C are equal partners in

partnership PRS, which owns Asset 1, an item of de-

preciable property that has a fair market value in ex-

cess of its adjusted tax basis. C sells its interest in

PRS to T while PRS has an election in effect under

section 754. PRS, therefore, increases the basis of

Asset 1 with respect to T.

(ii) Assume that in the year following the transfer

December 27, 1999 712 1999–52 I.R.B.

of the partnership interest to T, T’s distributive share

of the partnership’s common basis depreciation de-

ductions from Asset 1 is $1,000. Also assume that,

under paragraph (j)(4)(i)(B) of this section, the

amount of the basis adjustment under section 743(b)

that T recovers during the year is $500. The total

amount of depreciation deductions from Asset 1 re-

ported by T is equal to $1,500.

Example 2. (i) A and B form equal partnership

PRS. A contributes property with an adjusted

basis of $100,000 and a fair market value of

$500,000. B contributes $500,000 cash. When

PRS is formed, the property has five years re-

maining in its recovery period. The partnership’s

adjusted basis of $100,000 will, therefore, be re-

covered over the five years remaining in the

property’s recovery period. PRS elects to use the

remedial allocation method under §1.704-3(d)

with respect to the property. If PRS had pur-

chased the property at the time of the partner-

ship’s formation, the basis of the property would

have been recovered over a 10-year period. The

$400,000 of section 704(c) built-in gain will,

therefore, be amortized under §1.704-3(d) over a

10-year period beginning at the time of the part-

nership’s formation.

(ii)(A)Except for the depreciation deductions,

PRS’s expenses equal its income in each year of

the first two years commencing with the year the

partnership is formed. After two years, A’s share

of the adjusted basis of partnership property is

$120,000, while B’s is $440,000:

1999–52 I.R.B. 713 December 27, 1999

Capital Accounts

A B

Book Tax Book TaxInitialContribution $500,000 $100,000 $500,000 $500,000

Depreciation Year 1 (30,000) (30,000) (20,000)

Remedial 10,000 (10,000)470,000 110,000 470,000 470,000

DepreciationYear 2 (30,000) (30,000) (20,000)

Remedial 10,000 (10,000)$440,000 $120,000 $440,000 $440,000

(B) A sells its interest in PRS to T for its fair mar-

ket value of $440,000. A valid election under sec-

tion 754 is in effect with respect to the sale of the

partnership interest. Accordingly, PRS makes an ad-

justment, pursuant to section 743(b), to increase the

basis of partnership property. Under section 743(b),

the amount of the basis adjustment is equal to

$320,000. Under section 755, the entire basis ad-

justment is allocated to the property.

(iii) At the time of the transfer, $320,000 of sec-

tion 704(c) built-in gain from the property was still

reflected on the partnership’s books, and all of the

basis adjustment is attributable to section 704(c)

built-in gain. Therefore, the basis adjustment will be

recovered over the remaining recovery period for

the section 704(c) built-in gain under §1.704-3(d).

(ii) Decreases—(A) Reduced deduc-tion. The amount of any negative basisadjustment allocated to an item of depre-ciable or amortizable property that is re-covered in any year first decreases thetransferee’s distributive share of the part-nership’s depreciation or amortization de-ductions from that item of property for theyear. If the amount of the basis adjust-ment recovered in any year exceeds thetransferee’s distributive share of the part-nership’s depreciation or amortization de-ductions from the item of property, thenthe transferee’s distributive share of the

partnership’s depreciation or amortizationdeductions from other items of partner-ship property is decreased. The transfereethen recognizes ordinary income to theextent of the excess, if any, of the amountof the basis adjustment recovered in anyyear over the transferee’s distributiveshare of the partnership’s depreciation oramortization deductions from all items ofproperty.

(B) Recovery period. For purposes ofsection 168, if the basis of an item of apartnership’s recovery property is de-creased as the result of the transfer of aninterest in the partnership, then the de-crease is recovered over the remaininguseful life of the item of the partnership’srecovery property. The portion of the de-crease that is recovered in any year duringthe recovery period is equal to the productof—

(1) The amount of the decrease to theitem’s adjusted basis (determined as ofthe date of the transfer); multiplied by

(2) A fraction, the numerator of whichis the portion of the adjusted basis of theitem recovered by the partnership in thatyear, and the denominator of which is theadjusted basis of the item on the date ofthe transfer (determined prior to any basis

adjustments).(C) Examples. The provisions of this

paragraph (j)(4)(ii) are illustrated by thefollowing examples:

Example 1. (i) A, B, and C are equal partners in

partnership PRS, which owns Asset 2, an item of de-

preciable property that has a fair market value that is

less than its adjusted tax basis. C sells its interest in

PRS to T while PRS has an election in effect under

section 754. PRS, therefore, decreases the basis of

Asset 2 with respect to T.

(ii) Assume that in the year following the transfer

of the partnership interest to T, T’s distributive share

of the partnership’s common basis depreciation de-

ductions from Asset 2 is $1,000. Also assume that,

under paragraph (j)(4)(ii)(B) of this section, the

amount of the basis adjustment under section 743(b)

that T recovers during the year is $500. The total

amount of depreciation deductions from Asset 2 re-

ported by T is equal to $500.

Example 2. (i) A and B form equal partnership

PRS. A contributes property with an adjusted basis

of $100,000 and a fair market value of $50,000. B

contributes $50,000 cash. When PRS is formed, the

property has five years remaining in its recovery pe-

riod. The partnership’s adjusted basis of $100,000

will, therefore, be recovered over the five years re-

maining in the property’s recovery period. PRS uses

the traditional allocation method under §1.704-3(b)

with respect to the property. As a result, B will re-

ceive $5,000 of depreciation deductions from the

property in each of years 1-5, and A, as the con-

tributing partner, will receive $15,000 of deprecia-

tion deductions in each of these years.

(ii) Except for the depreciation deductions,

PRS’s expenses equal its income in each of the first

two years commencing with the year the partnership

is formed. After two years, A’s share of the adjusted

basis of partnership property is $70,000, while B’s is

$40,000. A sells its interest in PRS to T for its fair

market value of $40,000. A valid election under sec-

tion 754 is in effect with respect to the sale of the

partnership interest. Accordingly, PRS makes an ad-

justment, pursuant to section 743(b), to decrease the

basis of partnership property. Under section 743(b),

the amount of the adjustment is equal to ($30,000).

Under section 755, the entire adjustment is allocated

to the property.

(iii) The basis of the property at the time of the

transfer of the partnership interest was $60,000. In

each of years 3 through 5, the partnership will real-

ize depreciation deductions of $20,000 from the

property. Thus, one third of the negative basis ad-

justment ($10,000) will be recovered in each of

years 3 through 5. Consequently, T will be allo-

cated, for tax purposes, depreciation of $15,000 each

year from the partnership and will recover $10,000

of its negative basis adjustment. Thus, T’s net de-

preciation deduction from the partnership in each

year is $5,000.

Example 3. (i) A, B, and C are equal partners in

partnership PRS, which owns Asset 2, an item of de-

preciable property that has a fair market value that is

less than its adjusted tax basis. C sells its interest in

PRS to T while PRS has an election in effect under

section 754. PRS, therefore, decreases the basis of

Asset 2 with respect to T.

(ii) Assume that in the year following the transfer

of the partnership interest to T, T’s distributive share

of the partnership’s common basis depreciation de-

ductions from Asset 2 is $500. PRS allocates no

other depreciation to T. Also assume that, under

paragraph (j)(4)(ii)(B) of this section, the amount of

the negative basis adjustment that T recovers during

the year is $1,000. T will report $500 of ordinary in-

come because the amount of the negative basis ad-

justment recovered during the year exceeds T’s dis-

tributive share of the partnership’s common basis

depreciation deductions from Asset 2.

(5) Depletion. Where an adjustment ismade under section 743(b) to the basis ofpartnership property subject to depletion,any depletion allowance is determinedseparately for each partner, including thetransferee partner, based on the partner’sinterest in such property. See §1.702-1(a)(8). For partnerships that hold oil andgas properties that are depleted at the

partner level under section613A(c)(7)(D), the transferee partner(and not the partnership) must make thebasis adjustments, if any, required undersection 743(b) with respect to such prop-erties. See §1.613A-3(e)(6)(iv).

(6) Example. The provisions of para-graph (j)(5) of this section are illustratedby the following example:

Example. A, B, and C each contributes $5,000

cash to form partnership PRS, which purchases a

coal property for $15,000. A, B, and C have equal

interests in capital and profits. C subsequently sells

its partnership interest to T for $100,000 when the

election under section 754 is in effect. T has a basis

adjustment under section 743(b) for the coal prop-

erty of $95,000 (the difference between T’s basis,

$100,000, and its share of the basis of partnership

property, $5,000). Assume that the depletion al-

lowance computed under the percentage method

would be $21,000 for the taxable year so that each

partner would be entitled to $7,000 as its share of the

deduction for depletion. However, under the cost

depletion method, at an assumed rate of 10 percent,

the allowance with respect to T’s one-third interest

which has a basis to him of $100,000 ($5,000, plus

its basis adjustment of $95,000) is $10,000, although

the cost depletion allowance with respect to the one-

third interest of A and B in the coal property, each of

which has a basis of $5,000, is only $500. For part-

ners A and B, the percentage depletion is greater

than cost depletion and each will deduct $7,000

based on the percentage depletion method. How-

ever, as to T, the transferee partner, the cost deple-

tion method results in a greater allowance and T

will, therefore, deduct $10,000 based on cost deple-

tion. See section 613(a).

(k) Returns—(1) Statement of adjust-ments—(i) In general. A partnership thatmust adjust the bases of partnership prop-erties under section 743(b) must attach astatement to the partnership return for theyear of the transfer setting forth the nameand taxpayer identification number of thetransferee as well as the computation ofthe adjustment and the partnership prop-erties to which the adjustment has beenallocated.

(ii) Special rule. Where an interest istransferred in a partnership which holdsoil and gas properties that are depleted atthe partner level under section613A(c)(7)(D), the transferee must attacha statement to the transferee’s return forthe year of the transfer, setting forth thecomputation of the basis adjustmentunder section 743(b) which is allocable tosuch properties and the specific properties

to which the adjustment has been allo-cated.

(iii) Example. The provisions of para-graph (k)(1)(ii) of this section are illus-trated by the following example:

Example. (i) Partnership XYZ owns a single sec-

tion 613A(c)(7)(D) domestic oil and gas property

(Property) and other non-depletable assets. A, a

partner in XYZ with an adjusted tax basis in Prop-

erty of $100 (excluding any prior adjustments under

section 743(b)), sells its partnership interest to B for

$800 cash. Under §1.613A-3(e)(6)(iv), A’s adjusted

basis of $100 in Property carries over to B.

(ii) Under section 755, XYZ determines that

Property accounts for 50% of the fair market value

of all partnership assets. The remaining 50% of B’s

purchase price ($400) is attributable to non-de-

pletable property. XYZ must provide a statement to

B containing the portion of B’s adjusted basis attrib-

utable to non-depletable property ($400). Under this

paragraph (k)(1), XYZ must report basis adjust-

ments under section 743(b) to non-depletable prop-

erty. B must report basis adjustments under section

743(b) to Property.

(2) Requirement that transferee notifypartnership—(i) Sale or exchange. Atransferee that acquires, by sale or ex-change, an interest in a partnership withan election under section 754 in effect forthe taxable year of the transfer, must no-tify the partnership, in writing, within 30days of the sale or exchange. The writtennotice to the partnership must be signedunder penalties of perjury and must in-clude the names and addresses of thetransferee and (if ascertainable) of thetransferor, the taxpayer identificationnumbers of the transferee and (if ascer-tainable) of the transferor, the relationship(if any) between the transferee and thetransferor, the date of the transfer, theamount of any liabilities assumed or takensubject to by the transferee, and theamount of any money, the fair marketvalue of any other property delivered or tobe delivered for the transferred interest inthe partnership, and any other informationnecessary for the partnership to computethe transferee’s basis.

(ii) Transfer on death. A transferee thatacquires, on the death of a partner, an in-terest in a partnership with an electionunder section 754 in effect for the taxableyear of the transfer, must notify the part-nership, in writing, within one year of thedeath of the deceased partner. The writtennotice to the partnership must be signedunder penalties of perjury and must in-

December 27, 1999 714 1999–52 I.R.B.

clude the names and addresses of the de-ceased partner and the transferee, the tax-payer identification numbers of the de-ceased partner and the transferee, therelationship (if any) between the trans-feree and the transferor, the deceasedpartner’s date of death, the date on whichthe transferee became the owner of thepartnership interest, the fair market valueof the partnership interest on the applica-ble date of valuation set forth in section1014, and the manner in which the fairmarket value of the partnership interestwas determined.

(iii) Nominee reporting. If a partner-ship interest is transferred to a nomineewhich is required to furnish the statementunder section 6031(c)(1) to the partner-ship, the nominee may satisfy the noticerequirement contained in this paragraph(k)(2) by providing the statement requiredunder §1.6031(c)-1T, provided that thestatement satisfies all requirements of§1.6031(c)-1T and this paragraph (k)(2).(3) Reliance. In making the adjust-

ments under section 743(b) and any state-ment or return relating to such adjust-ments under this section, a partnershipmay rely on the written notice providedby a transferee pursuant to paragraph(k)(2) of this section to determine thetransferee’s basis in a partnership interest.The previous sentence shall not apply ifany partner who has responsibility forfederal income tax reporting by the part-nership has knowledge of facts indicatingthat the statement is clearly erroneous.

(4) Partnership not required to make orreport adjustments under section 743(b)until it has notice of the transfer. A part-nership is not required to make the adjust-ments under section 743(b) (or any state-ment or return relating to thoseadjustments) with respect to any transferuntil it has been notified of the transfer.For purposes of this section, a partnershipis notified of a transfer when either—

(i) The partnership receives the writtennotice from the transferee required underparagraph (k)(2) of this section; or

(ii) Any partner who has responsibilityfor federal income tax reporting by thepartnership has knowledge that there hasbeen a transfer of a partnership interest.

(5) Effect on partnership of the failureof the transferee to comply. If the trans-feree fails to provide the partnershipwith the written notice required by para-

graph (k)(2) of this section, the partner-ship must attach a statement to its returnin the year that the partnership is other-wise notified of the transfer. This state-ment must set forth the name and tax-payer identi f icat ion number ( i fascertainable) of the transferee. In addi-tion, the following statement must beprominently displayed in capital letterson the first page of the partnership’s re-turn for such year, and on the first pageof any schedule or information state-ment relating to such transferee’s shareof income, credits, deductions, etc.:“RETURN FILED PURSUANT TO§1.743-1(k)(5).” The partnership willthen be entitled to report the transferee’sshare of partnership items without ad-justment to reflect the transferee’s basisadjustment in partnership property. If,following the filing of a return pursuantto this paragraph (k)(5), the transfereeprovides the applicable written notice tothe partnership, the partnership mustmake such adjustments as are necessaryto adjust the basis of partnership prop-erty (as of the date of the transfer) in anyamended return otherwise to be filed bythe partnership or in the next annualpartnership return of income to be regu-larly filed by the partnership. At suchtime, the partnership must also providethe transferee with such information asis necessary for the transferee to amendits prior returns to properly reflect theadjustment under section 743(b).

(l) Effective date. This section appliesto transfers of partnership interests thatoccur on or after December 15, 1999.

Par. 6. Section 1.751-1 is amended by:1. Revising paragraphs (a)(2) and

(a)(3).2. Revising paragraph (c)(3).3. Removing paragraph (c)(4)(x).4. Adding a sentence at the end of para-

graph (f).5. Revising Example 1of paragraph

(g).The addition and revisions read as

follows:§1.751-1 Unrealized receivables andinventory items.* * * * *

(a) * * *(2) Determination of gain or loss. The

income or loss realized by a partner uponthe sale or exchange of its interest in sec-tion 751 property is the amount of income

or loss from section 751 property (includ-ing any remedial allocations under§1.704-3(d)) that would have been allo-cated to the partner (to the extent attribut-able to the partnership interest sold or ex-changed) if the partnership had sold all ofits property in a fully taxable transactionfor cash in an amount equal to the fairmarket value of such property (taking intoaccount section 7701(g)) immediatelyprior to the partner’s transfer of the inter-est in the partnership. Any gain or lossrecognized that is attributable to section751 property will be ordinary gain or loss.The difference between the amount ofcapital gain or loss that the partner wouldrealize in the absence of section 751 andthe amount of ordinary income or loss de-termined under this paragraph (a)(2) is thetransferor’s capital gain or loss on the saleof its partnership interest.

(3) Statement required. A partner sell-ing or exchanging any part of an interestin a partnership that has any section 751property at the time of sale or exchangemust submit with its income tax return forthe taxable year in which the sale or ex-change occurs a statement setting forthseparately the following information—

(i) The date of the sale or exchange;(ii) The amount of any gain or loss at-

tributable to the section 751 property; and(iii) The amount of any gain or loss at-

tributable to capital gain or loss on thesale of the partnership interest.* * * * *

(c) Unrealized receivables. * * *(3) In determining the amount of the

sale price attributable to such unrealizedreceivables, or their value in a distributiontreated as a sale or exchange, full accountshall be taken not only of the estimatedcost of completing performance of thecontract or agreement, but also of the timebetween the sale or distribution and thetime of payment.* * * * *

(f) * * * The rules contained in para-graphs (a)(2) and (a)(3) of this sectionapply to transfers of partnership intereststhat occur on or after December 15, 1999.

(g) * * * Example 1. (i)(A) A and B are equal partners in

personal service partnership PRS. B transfers its in-

terest in PRS to T for $15,000 when PRS’s balance

sheet (reflecting a cash receipts and disbursements

method of accounting) is as follows:

1999–52 I.R.B. 715 December 27, 1999

Assets

FairAdjusted Market

Basis Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,000 $ 3,000Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000 10,000Capital Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,000 5,000Unrealized Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 14,000

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 32,000

December 27, 1999 716 1999–52 I.R.B.

(B) None of the assets owned by PRS is section

704(c) property, and the capital assets are nondepre-

ciable. The total amount realized by B is $16,000,

consisting of the cash received, $15,000, plus

$1,000, B’s share of the partnership liabilities as-

sumed by T. See section 752. B’s undivided half-in-

terest in the partnership property includes a half-in-

terest in the partnership’s unrealized receivables

items. B’s basis for its partnership interest is

$10,000 ($9,000, plus $1,000, B’s share of partner-

ship liabilities). If section 751(a) did not apply to

the sale, B would recognize $6,000 of capital gain

from the sale of the interest in PRS. However, sec-

tion 751(a) does apply to the sale.

(ii) If PRS sold all of its section 751 property in a

fully taxable transaction immediately prior to the

transfer of B’s partnership interest to T, B would

have been allocated $7,000 of ordinary income from

the sale of PRS’s unrealized receivables. Therefore,

B will recognize $7,000 of ordinary income with re-

spect to the unrealized receivables. The difference

between the amount of capital gain or loss that the

partner would realize in the absence of section 751

($6,000) and the amount of ordinary income or loss

determined under paragraph (a)(2) of this section

($7,000) is the transferor’s capital gain or loss on the

sale of its partnership interest. In this case, B will

recognize a $1,000 capital loss.

* * * * *Par. 7. Section 1.754-1 is amended as

follows:1. Designate the text following the head-

ing of paragraph (c) as paragraph (c)(1).

2. Add a heading to newly designatedparagraph (c)(1).

3. Add paragraph (c)(2).The additions read as follows:

§1.754-1 Time and manner of makingelection to adjust basis of partnershipproperty.* * * * *

(c) Revocation of election—(1) In gen-eral. * * *

(2) Revocations made for first taxableyear ending after December 15, 1999.Notwithstanding paragraph (c)(1) of thissection, any partnership having an elec-tion in effect under this section for its tax-able year that includes December 15,1999 may revoke such election by attach-ing a statement to the partnership’s returnfor such year. For the revocation to bevalid, the statement must be filed not laterthan the time prescribed by §1.6031(a)-1(e) (including extensions thereof) for fil-ing the return for such taxable year, andmust set forth the name and address of thepartnership revoking the election, besigned by any one of the partners who isauthorized to sign the partnership’s fed-eral income tax return, and contain a dec-laration that the partnership revokes itselection under section 754 to apply theprovisions of section 734(b) and 743(b).In addition, the following statement mustbe prominently displayed in capital letters

on the first page of the partnership’s re-turn for such year: “RETURN FILEDPURSUANT TO §1.754-1(c)(2).”

Par. 8. Section 1.755-1 is revised toread as follows:§1.755-1 Rules for allocation of basis.

(a) Generally. A partnership that hasan election in effect under section 754must adjust the basis of partnership prop-erty under the provisions of section734(b) and section 743(b) pursuant to theprovisions of this section. The basis ad-justment is first allocated between the twoclasses of property described in section755(b). These classes of property consistof capital assets and section 1231(b) prop-erty (capital gain property), and any otherproperty of the partnership (ordinary in-come property). For purposes of this sec-tion, properties and potential gain treatedas unrealized receivables under section751(c) and the regulations thereundershall be treated as separate assets that areordinary income property. The portion ofthe basis adjustment allocated to eachclass is then allocated among the itemswithin the class. Adjustments under sec-tion 743(b) are allocated under paragraph(b) of this section. Adjustments undersection 734(b) are allocated under para-graph (c) of this section.

(b) Adjustments under section743(b)—(1) Generally. (i) For ex-

Liabilities and Capital

FairAdjusted MarketPer Books Value

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,000 $ 2,000Capital:

A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,000 15,000B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 15,000

Total 20,000 32,000

changes in which the transferee’s basis inthe interest is determined in whole or inpart by reference to the transferor’s basisin the interest, paragraph (b)(5) of thissection shall apply. For all other trans-fers which result in a basis adjustmentunder section 743(b), paragraphs (b)(2)through (b)(4) of this section shall apply.Except as provided in paragraph (b)(5) ofthis section, the portion of the basis ad-justment allocated to one class of prop-erty may be an increase while the portionallocated to the other class is a decrease.This would be the case even though thetotal amount of the basis adjustment iszero. Except as provided in paragraph(b)(5) of this section, the portion of thebasis adjustment allocated to one item ofproperty within a class may be an in-crease while the portion allocated to an-other is a decrease. This would be thecase even though the basis adjustment al-located to the class is zero.

(ii) Hypothetical transaction. For pur-poses of paragraphs (b)(2) through (b)(4)of this section, the allocation of the basisadjustment under section 743(b) betweenthe classes of property and among theitems of property within each class are

made based on the allocations of income,gain, or loss (including remedial alloca-tions under §1.704-3(d)) that the trans-feree partner would receive (to the extentattributable to the acquired partnership in-terest) if, immediately after the transfer ofthe partnership interest, all of the partner-ship’s property were disposed of in a fullytaxable transaction for cash in an amountequal to the fair market value of suchproperty (the hypothetical transaction).

(2) Allocations between classes ofproperty—(i) In general. The amount ofthe basis adjustment allocated to the classof ordinary income property is equal tothe total amount of income, gain, or loss(including any remedial allocations under§1.704-3(d)) that would be allocated tothe transferee (to the extent attributable tothe acquired partnership interest) from thesale of all ordinary income property in thehypothetical transaction. The amount ofthe basis adjustment to capital gain prop-erty is equal to—

(A) The total amount of the basis ad-justment under section 743(b); less

(B) The amount of the basis adjustmentallocated to ordinary income propertyunder the preceding sentence; provided,

however, that in no event may the amountof any decrease in basis allocated to capi-tal gain property exceed the partnership’sbasis (or in the case of property subject tothe remedial allocation method, the trans-feree’s share of any remedial loss under§1.704-3(d) from the hypothetical transac-tion) in capital gain property. In the eventthat a decrease in basis allocated to capitalgain property would otherwise exceed thepartnership’s basis in capital gain prop-erty, the excess must be applied to reducethe basis of ordinary income property.

(ii) Examples. The provisions of thisparagraph (b)(2) are illustrated by the fol-lowing examples:

Example 1. (i) A and B form equal partnership

PRS. A contributes $50,000 and Asset 1, a nonde-

preciable capital asset with a fair market value of

$50,000 and an adjusted tax basis of $25,000. B

contributes $100,000. PRS uses the cash to pur-

chase Assets 2, 3, and 4. After a year, A sells its in-

terest in PRS to T for $120,000. At the time of the

transfer, A’s share of the partnership’s basis in part-

nership assets is $75,000. Therefore, T receives a

$45,000 basis adjustment.

(ii) Immediately after the transfer of the partner-

ship interest to T, the adjusted basis and fair market

value of PRS’s assets are as follows:

1999–52 I.R.B. 717 December 27, 1999

Assets

FairAdjusted Market

Basis Value

Capital Gain Property:Asset 1 $ 25,000 $ 75,000Asset 2 100,000 117,500

Ordinary Income Property:Asset 3 $ 40,000 $ 45,000Asset 4 10,000 2,500

Total $175,000 $240,000

(iii) If PRS sold all of its assets in a fully tax-

able transaction at fair market value immediately

after the transfer of the partnership interest to T,

the total amount of capital gain that would be allo-

cated to T is equal to $46,250 ($25,000 section

704(c) built-in gain from Asset 1, plus fifty per-

cent of the $42,500 appreciation in capital gain

property). T would also be allocated a $1,250 or-

dinary loss from the sale of the ordinary income

property.

(iv) The amount of the basis adjustment that is

allocated to ordinary income property is equal to

($1,250) (the amount of the loss allocated to T

from the hypothetical sale of the ordinary income

property).

(v) The amount of the basis adjustment that is

allocated to capital gain property is equal to

$46,250 (the amount of the basis adjustment,

$45,000, less ($1,250), the amount of loss allo-

cated to T from the hypothetical sale of the ordi-

nary income property).

Example 2. (i) A and B form equal partnership

PRS. A and B each contribute $1,000 cash which

the partnership uses to purchase Assets 1, 2, 3, and

4. After a year, A sells its partnership interest to T

for $1,000. T’s basis adjustment under section

743(b) is zero.

(ii) Immediately after the transfer of the partner-

ship interest to T, the adjusted basis and fair market

value of PRS’s assets are as follows:

Assets

FairAdjusted Market

Basis Value

Capital Gain Property:Asset 1 $ 500 $ 750Asset 2 500 500

Ordinary Income Property:Asset 3 $ 500 $ 250Asset 4 500 500

Total $2,000 $2,000

December 27, 1999 718 1999–52 I.R.B.

(iii) If, immediately after the transfer of the part-

nership interest to T, PRS sold all of its assets in a

fully taxable transaction at fair market value, T

would be allocated a loss of $125 from the sale of

the ordinary income property. Thus, the amount of

the basis adjustment to ordinary income property is

($125). The amount of the basis adjustment to capi-

tal gain property is $125 (zero, the amount of the

basis adjustment under section 743(b), less ($125),

amount of the basis adjustment allocated to ordinary

income property).

(3) Allocation within the class—(i)Ordinary income property. The amountof the basis adjustment to each item ofproperty within the class of ordinary in-come property is equal to—

(A) The amount of income, gain, orloss (including any remedial allocationsunder §1.704-3(d)) that would be allo-cated to the transferee (to the extent at-tributable to the acquired partnership in-terest) from the hypothetical sale of theitem; reduced by

(B) The product of— (1) Any decrease to the amount of the

basis adjustment to ordinary income prop-erty required pursuant to the last sentenceof paragraph (b)(2)(i) of this section; mul-tiplied by

(2) A fraction, the numerator of whichis the fair market value of the item ofproperty to the partnership and the de-nominator of which is the total fair marketvalue of all of the partnership’s items ofordinary income property.

(ii) Capital gain property. The amountof the basis adjustment to each item ofproperty within the class of capital gainproperty is equal to—

(A) The amount of income, gain, orloss (including any remedial allocationsunder §1.704-3(d)) that would be allo-cated to the transferee (to the extent at-tributable to the acquired partnership in-

terest) from the hypothetical sale of theitem; minus

(B) The product of— (1) The total amount of gain or loss (in-

cluding any remedial allocations under§1.704-3(d)) that would be allocated tothe transferee (to the extent attributable tothe acquired partnership interest) from thehypothetical sale of all items of capitalgain property, minus the amount of thepositive basis adjustment to all items ofcapital gain property or plus the amountof the negative basis adjustment to capitalgain property; multiplied by

(2) A fraction, the numerator of whichis the fair market value of the item ofproperty to the partnership, and the de-nominator of which is the fair marketvalue of all of the partnership’s items ofcapital gain property.

(iii) Examples. The provisions of thisparagraph (b)(3) are illustrated by the fol-lowing examples:

Example 1. (i) Assume the same facts as Exam-

ple 1 in paragraph (b)(2)(ii) of this section. Of the

$45,000 basis adjustment, $46,250 was allocated to

capital gain property. The amount allocated to ordi-

nary income property was ($1,250).

(ii) Asset 1 is a capital gain asset, and T would be

allocated $37,500 from the sale of Asset 1 in the hy-

pothetical transaction. Therefore, the amount of the

adjustment to Asset 1 is $37,500.

(iii) Asset 2 is a capital gain asset, and T would

be allocated $8,750 from the sale of Asset 2 in the

hypothetical transaction. Therefore, the amount of

the adjustment to Asset 2 is $8,750.

(iv) Asset 3 is ordinary income property, and T

would be allocated $2,500 from the sale of Asset 3

in the hypothetical transaction. Therefore, the

amount of the adjustment to Asset 3 is $2,500.

(v) Asset 4 is ordinary income property, and T

would be allocated ($3,750) from the sale of Asset 4

in the hypothetical transaction. Therefore, the

amount of the adjustment to Asset 4 is ($3,750).

Example 2. (i) Assume the same facts as Exam-

ple 1 in paragraph (b)(2)(ii) of this section, except

that A sold its interest in PRS to T for $110,000

rather than $120,000. T, therefore, receives a basis

adjustment under section 743(b) of $35,000. Of the

$35,000 basis adjustment, ($1,250) is allocated to

ordinary income property, and $36,250 is allocated

to capital gain property.

(ii) Asset 3 is ordinary income property, and T

would be allocated $2,500 from the sale of Asset 3

in the hypothetical transaction. Therefore, the

amount of the adjustment to Asset 3 is $2,500.

(iii) Asset 4 is ordinary income property, and T

would be allocated ($3,750) from the sale of Asset 4

in the hypothetical transaction. Therefore, the

amount of the adjustment to Asset 4 is ($3,750).

(iv) Asset 1 is a capital gain asset, and T would

be allocated $37,500 from the sale of Asset 1 in the

hypothetical transaction. Asset 2 is a capital gain

asset, and T would be allocated $8,750 from the sale

of Asset 2 in the hypothetical transaction. The total

amount of gain that would be allocated to T from the

sale of the capital gain assets in the hypothetical

transaction is $46,250, which exceeds the amount of

the basis adjustment allocated to capital gain prop-

erty by $10,000. The amount of the adjustment to

Asset 1 is $33,604 ($37,500 minus $3,896 ($10,000

x $75,000/192,500)). The amount of the basis ad-

justment to Asset 2 is $2,646 ($8,750 minus $6,104

($10,000 x $117,500/192,500)).

(4) Income in respect of a decedent—(i) In general. Where a partnership in-terest is transferred as a result of thedeath of a partner, under section 1014(c)the transferee’s basis in its partnershipinterest is not adjusted for that portionof the interest, if any, which is attribut-able to items representing income in re-spect of a decedent under section 691.See §1.742-1. Accordingly, if a partner-ship interest is transferred as a result ofthe death of a partner, and the partner-ship holds assets representing income inrespect of a decedent, no part of the

basis adjustment under section 743(b) isallocated to these assets. See §1.743-1(b).

(ii) The provisions of this paragraph

(b)(4) are illustrated by the following ex-ample:

Example. (i) A and B are equal partners in per-

sonal service partnership PRS. As a result of B’s

death, B’s partnership interest is transferred to T

when PRS’s balance sheet (reflecting a cash re-

ceipts and disbursements method of accounting) is

as follows:

1999–52 I.R.B. 719 December 27, 1999

Assets

FairAdjusted Market

Basis Value

Capital Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 2,000 $ 5,000Unrealized Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 15,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,000 20,000

Liabilities and Capital

FairAdjusted MarketPer Books Value

Capital:A 1,000 10,000B 1,000 10,000

Total 2,000 20,000

(ii) None of the assets owned by PRS is section

704(c) property, and the capital asset is nondeprecia-

ble. The fair market value of T’s partnership interest

on the applicable date of valuation set forth in sec-

tion 1014 is $10,000. Of this amount, $2,500 is at-

tributable to T’s share of the partnership’s capital

asset, and $7,500 is attributable to T’s 50% share of

the partnership’s unrealized receivables. The part-

nership’s unrealized receivables represent income in

respect of a decedent. Accordingly, under section

1014(c), T’s basis in its partnership interest is not

adjusted for that portion of the interest which is at-

tributable to the unrealized receivables. Therefore,

T’s basis in its partnership interest is $2,500.

(iii) At the time of the transfer, B’s share of the

partnership’s basis in partnership assets is $1,000.

Accordingly, T receives a $1,500 basis adjustment

under section 743(b). Under this paragraph (b)(4),

the entire basis adjustment is allocated to the part-

nership’s capital asset.

(5) Transferred basis exchanges—(i) Ingeneral. This paragraph (b)(5) applies tobasis adjustments under section 743(b)which result from exchanges in which thetransferee’s basis in the interest is deter-mined in whole or in part by reference tothe transferor’s basis in the interest. Forexample, this paragraph applies if a part-nership interest is contributed to a corpo-ration in a transaction to which section

351 applies or to a partnership in a trans-action to which section 721(a) applies.

(ii) Allocations between classes of prop-erty. If the total amount of the basis adjust-ment under section 743(b) is zero, then noadjustment to the basis of partnership prop-erty will be made under this paragraph(b)(5). If there is an increase in basis to beallocated to partnership assets, such in-crease must be allocated to capital gainproperty or ordinary income property, re-spectively, only if the total amount of gainor loss (including any remedial allocationsunder §1.704-3(d)) that would be allocatedto the transferee (to the extent attributableto the acquired partnership interest) fromthe hypothetical sale of all such propertywould result in a net gain or net income, asthe case may be, to the transferee. Where,under the preceding sentence, an increasein basis may be allocated to both capitalgain assets and ordinary income assets, theincrease shall be allocated to each class inproportion to the net gain or net income, re-spectively, which would be allocated to thetransferee from the sale of all assets in eachclass. If there is a decrease in basis to be al-located to partnership assets, such decreasemust be allocated to capital gain property orordinary income property, respectively,

only if the total amount of gain or loss (in-cluding any remedial allocations under§1.704-3(d)) that would be allocated to thetransferee (to the extent attributable to theacquired partnership interest) from the hy-pothetical sale of all such property wouldresult in a net loss to the transferee. Where,under the preceding sentence, a decrease inbasis may be allocated to both capital gainassets and ordinary income assets, the de-crease shall be allocated to each class inproportion to the net loss which would beallocated to the transferee from the sale ofall assets in each class.

(iii) Allocations within the classes—(A)Increases. If there is an increase in basis tobe allocated within a class, the increasemust be allocated first to properties withunrealized appreciation in proportion to thetransferee’s share of the respective amountsof unrealized appreciation before such in-crease (but only to the extent of the trans-feree’s share of each property’s unrealizedappreciation). Any remaining increasemust be allocated among the propertieswithin the class in proportion to the trans-feree’s share of the amount that would berealized by the partnership upon the hypo-thetical sale of each asset in the class.

(B) Decreases. If there is a decrease

in basis to be allocated within a class,the decrease must be allocated first toproperties with unrealized depreciationin proportion to the transferee’s sharesof the respective amounts of unrealizeddepreciation before such decrease (butonly to the extent of the transferee’sshare of each property’s unrealized de-preciation). Any remaining decreasemust be allocated among the propertieswithin the class in proportion to thetransferee’s shares of their adjustedbases (as adjusted under the precedingsentence).

(C) Limitation in decrease of basis.Where, as the result of a transaction towhich this paragraph (b)(5) applies, adecrease in basis must be allocated tocapital gain assets, ordinary income as-sets, or both, and the amount of the de-crease otherwise allocable to a particularclass exceeds the transferee’s share ofthe adjusted basis to the partnership ofall depreciated assets in that class, thetransferee’s negative basis adjustment islimited to the transferee’s share of thepartnership’s adjusted basis in all depre-

ciated assets in that class.(D) Carryover adjustment. Where a

transferee’s negative basis adjustmentunder section 743(b) cannot be allocatedto any asset, because the adjustment ex-ceeds the transferee’s share of the ad-justed basis to the partnership of all de-preciated assets in a particular class, theadjustment is made when the partner-ship subsequently acquires property of alike character to which an adjustmentcan be made.

(iv) Examples. The provisions of thisparagraph (b)(5) are illustrated by the fol-lowing examples:

Example 1. A is a member of partnership LTP,

which has made an election under section 754. The

three partners in LTP have equal interests in capital

and profits. Solely in exchange for a partnership in-

terest in UTP, A contributes its interest in LTP to

UTP in a transaction described in section 721. At

the time of the transfer, A’s basis in its partnership

interest ($5,000) equals its share of inside basis

(also $5,000). Under section 723, UTP’s basis in its

interest in LTP is $5,000. LTP’s only two assets on

the date of contribution are inventory with a basis

of $5,000 and a fair market value of $7,500, and a

nondepreciable capital asset with a basis of $10,000

and a fair market value of $7,500. The amount of

the basis adjustment under section 743(b) to part-

nership property is $0 ($5,000, UTP’s basis in its

interest in LTP, minus $5,000, UTP’s share of LTP’s

basis in partnership assets). Because UTP acquired

its interest in LTP in a transferred basis exchange,

and the total amount of the basis adjustment under

section 743(b) is zero, UTP receives no special

basis adjustments under section 743(b) with respect

to the partnership property of LTP.

Example 2. (i) A purchases a partnership interest

in LTP at a time when an election under section 754

is not in effect. The three partners in LTP have equal

interests in capital and profits. During a later year

for which LTP has an election under section 754 in

effect, and in a transaction that is unrelated to A’s

purchase of the LTP interest, A contributes its inter-

est in LTP to UTP in a transaction described in sec-

tion 721 (solely in exchange for a partnership inter-

est in UTP). At the time of the transfer, A’s adjusted

basis in its interest in LTP is $20,433. Under section

721, A recognizes no gain or loss as a result of the

contribution of its partnership interest to UTP.

Under section 723, UTP’s basis in its partnership in-

terest in LTP is $20,433. The balance sheet of LTP

on the date of the contribution shows the following:

December 27, 1999 720 1999–52 I.R.B.

Assets

FairAdjusted Market

Basis Value

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 5,000 $5,000Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000 10,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,000 21,000Nondepreciable capital asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,000 40,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000 $76,000

Liabilities and Capital

FairAdjusted MarketPer Books Value

Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$10,000 $10,000Capital:A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 22,000B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 22,000C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000 22,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$55,000 $76,000

(ii) The amount of the basis adjustment under

section 743(b) is the difference between the basis of

UTP’s interest in LTP and UTP’s share of the ad-

justed basis to LTP of partnership property. UTP’s

interest in the previously taxed capital of LTP is

$15,000 ($22,000, the amount of cash UTP would

receive if LTP liquidated immediately after the hy-

pothetical transaction, decreased by $7,000, the

amount of tax gain allocated to UTP from the hypo-

thetical transaction). UTP’s share of the adjusted

basis to LTP of partnership property is $18,333

($15,000 share of previously taxed capital, plus

$3,333 share of LTP’s liabilities). The amount of the

basis adjustment under section 743(b) to partnership

property therefore, is $2,100 ($20,433 minus

$18,333).

(iii) The total amount of gain that would be allo-

cated to UTP from the hypothetical sale of capital

gain property is $6,666.67 (one-third of the excess

of the fair market value of LTP’s nondepreciable

capital asset, $40,000, over its basis, $20,000). The

total amount of gain that would be allocated to UTP

from the hypothetical sale of ordinary income prop-

erty is $333.33 (one-third of the excess of the fair

market value of LTP’s inventory, $21,000, over its

basis, $20,000). Under paragraph (b)(5), LTP must

allocate $2,000 ($6,666.67 divided by $7,000 times

$2,100) of UTP’s basis adjustment to the nondepre-

ciable capital asset. LTP must allocate $100

($333.33 divided by $7,000 times $2,100) of UTP’s

basis adjustment to the inventory.

(c) Adjustments under section 734(b)—(1) Allocations between classes of prop-erty—(i) General rule. Where there is adistribution of partnership property result-ing in an adjustment to the basis of undis-tributed partnership property under sec-tion 734(b)(1)(B) or (b)(2)(B), theadjustment must be allocated to remain-ing partnership property of a charactersimilar to that of the distributed propertywith respect to which the adjustmentarose. Thus, when the partnership’s ad-justed basis of distributed capital gainproperty immediately prior to distributionexceeds the basis of the property to thedistributee partner (as determined undersection 732), the basis of the undistrib-uted capital gain property remaining inthe partnership is increased by an amountequal to the excess. Conversely, when thebasis to the distributee partner (as deter-

mined under section 732) of distributedcapital gain property exceeds the partner-ship’s adjusted basis of such property im-mediately prior to the distribution, thebasis of the undistributed capital gainproperty remaining in the partnership isdecreased by an amount equal to such ex-cess. Similarly, where there is a distribu-tion of ordinary income property, and thebasis of the property to the distributeepartner (as determined under section 732)is not the same as the partnership’s ad-justed basis of the property immediatelyprior to distribution, the adjustment ismade only to undistributed property of thesame class remaining in the partnership.

(ii) Special rule. Where there is a dis-tribution resulting in an adjustment undersection 734(b)(1)(A) or (b)(2)(A) to thebasis of undistributed partnership prop-erty, the adjustment is allocated only tocapital gain property.

(2) Allocations within the classes—(i)Increases. If there is an increase in basisto be allocated within a class, the increasemust be allocated first to properties withunrealized appreciation in proportion totheir respective amounts of unrealized ap-preciation before such increase (but onlyto the extent of each property’s unrealizedappreciation). Any remaining increasemust be allocated among the propertieswithin the class in proportion to their fairmarket values.

(ii) Decreases. If there is a decrease inbasis to be allocated within a class, thedecrease must be allocated first to proper-ties with unrealized depreciation in pro-portion to their respective amounts of un-realized depreciation before such

decrease (but only to the extent of eachproperty’s unrealized depreciation). Anyremaining decrease must be allocatedamong the properties within the class inproportion to their adjusted bases (as ad-justed under the preceding sentence).

(3) Limitation in decrease of basis.Where a decrease in the basis of partner-ship assets is required under section734(b)(2) and the amount of the decreaseexceeds the adjusted basis to the partner-ship of property of the required character,the basis of such property is reduced tozero (but not below zero).

(4) Carryover adjustment. Where, inthe case of a distribution, an increase or adecrease in the basis of undistributedproperty cannot be made because the part-nership owns no property of the characterrequired to be adjusted, or because thebasis of all the property of a like characterhas been reduced to zero, the adjustmentis made when the partnership subse-quently acquires property of a like charac-ter to which an adjustment can be made.

(5) Example. The following example il-lustrates this paragraph (c):

Example. (i) A, B, and C form equal partnership

PRS. A contributes $50,000 and Asset 1, capital

gain property with a fair market value of $50,000

and an adjusted tax basis of $25,000. B and C each

contributes $100,000. PRS uses the cash to pur-

chase Assets 2, 3, 4, 5, and 6. Assets 4, 5, and 6 are

the only assets held by the partnership which are

subject to section 751. The partnership has an elec-

tion in effect under section 754. After seven years,

the adjusted basis and fair market value of PRS’s as-

sets are as follows:

1999–52 I.R.B. 721 December 27, 1999

Assets

FairAdjusted Market

Basis Value

Capital Gain Property:Asset 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 25,000 $ 75,000Asset 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000 117,500Asset 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,000 60,000

Ordinary Income Property:Asset 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 40,000 $ 45,000Asset 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50,000 60,000Asset 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 2,500

Total $275,000 $360,000

(ii) Allocation between classes. Assume thatPRS distributes Assets 3 and 5 to A in complete liq-uidation of A’s interest in the partnership. A’s basisin the partnership interest was $75,000. The partner-ship’s basis in Assets 3 and 5 was $50,000 each. A’s$75,000 basis in its partnership interest is allocatedbetween Assets 3 and 5 under sections 732(b) and(c). A will, therefore, have a basis of $25,000 inAsset 3 (capital gain property), and a basis of$50,000 in Asset 5 (section 751 property). The dis-tribution results in a $25,000 increase in the basis ofcapital gain property. There is no change in thebasis of ordinary income property.

(iii) Allocation within class. The amount of thebasis increase to capital gain property is $25,000 andmust be allocated among the remaining capital gainassets in proportion to the difference between thefair market value and basis of each. The fair marketvalue of Asset 1 exceeds its basis by $50,000. Thefair market value of Asset 2 exceeds its basis by$17,500. Therefore, the basis of Asset 1 will be in-creased by $18,519 ($25,000, multiplied by$50,000, divided by $67,500), and the basis of Asset2 will be increased by $6,481 ($25,000 multipliedby $17,500, divided by $67,500).

(d) Effective date. This section applies totransfers of partnership interests and distri-butions of property from a partnership thatoccur on or after December 15, 1999.

Par. 9. Section 1.1017-1 is amended by:1. Revising paragraph (g)(2)(iv).2. Adding paragraph (g)(2)(v).The addition and revision read as follows:

§1.1017-1 Basis reductions following adischarge of indebtedness.* * * * *

(g) * * * (2) * * *(iv) Partner’s share of partnership

basis—(A) In general. For purposes ofthis paragraph (g), a partner’s proportion-ate share of the partnership’s basis in de-preciable property (or depreciable realproperty) is equal to the sum of—

(1) The partner’s section 743(b) basisadjustments to items of partnership depre-ciable property (or depreciable real prop-erty); and

(2) The common basis depreciation de-ductions (but not including remedial allo-cations of depreciation deductions under§1.704-3(d)) that, under the terms of thepartnership agreement effective for thetaxable year in which the discharge of in-debtedness occurs, are reasonably ex-pected to be allocated to the partner overthe property’s remaining useful life. Theassumptions made by a partnership in de-termining the reasonably expected alloca-tion of depreciation deductions must beconsistent for each partner. For example,a partnership may not treat the same de-

preciation deductions as being reasonablyexpected by more than one partner.

(B) Effective date. This paragraph(g)(2)(iv) applies to elections made undersections 108(b)(5) and 108(c) on or afterDecember 15, 1999.

(v) Treatment of basis reduction—(A)Basis adjustment. The amount of the re-duction to the basis of depreciable part-nership property constitutes an adjust-ment to the basis of partnership propertywith respect to the partner only. No ad-justment is made to the common basis ofpartnership property. Thus, for purposesof income, deduction, gain, loss, and dis-tribution, the partner will have a specialbasis for those partnership properties thebases of which are adjusted under section1017 and this section.

(B) Recovery of adjustments to basis ofpartnership property. Adjustments to thebasis of partnership property under thissection are recovered in the manner de-scribed in §1.743-1.

(C) Effect of basis reduction. Adjust-ments to the basis of partnership propertyunder this section are treated in the samemanner and have the same effect as an ad-justment to the basis of partnership prop-erty under section 743(b). The followingexample illustrates this paragraph (g)(2)(v):

Example. (i) A, B, and C are equal partners in part-

nership PRS, which owns (among other things) Asset

1, an item of depreciable property with a basis of

$30,000. A’s basis in its partnership interest is $20,000.

Under the terms of the partnership agreement, A’s share

of the depreciation deductions from Asset 1 over its re-

maining useful life will be $10,000. Under section

1017, A requests, and PRS agrees, to decrease the basis

of Asset 1 with respect to A by $10,000.

(ii) In the year following the reduction of basis

under section 1017, PRS amends its partnership agree-

ment to provide that items of depreciation and loss

from Asset 1 will be allocated equally between B and

C. In that year, A’s distributive share of the partner-

ship’s common basis depreciation deductions from

Asset 1 is now $0. Under §1.743-1(j)(4)(ii)(B), the

amount of the section 1017 basis adjustment that A re-

covers during the year is $1,000. A will report $1,000

of ordinary income because A’s distributive share of the

partnership’s common basis depreciation deductions

from Asset 1 ($0) is insufficient to offset the amount of

the section 1017 basis adjustment recovered by A dur-

ing the year ($1,000).

(iii) In the following year, PRS sells Asset 1 for

$15,000 and recognizes a $12,000 loss. This loss is

allocated equally between B and C, and A’s share of

the loss is $0. Upon the sale of Asset 1, A recovers

its entire remaining section 1017 basis adjustment

($9,000). A will report $9,000 of ordinary income.

(D) Effective date. This paragraph(g)(2)(v) applies to elections made undersections 108(b)(5) and 108(c) on or afterDecember 15, 1999.

PART 602—OMB CONTROL NUM-BERS UNDER THE PAPERWORK RE-DUCTION ACT

Par. 10. The authority citationfor part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 11. In §602.101, paragraph (b) is

amended by revising the entries for 1.732-1 and

1.743-1 in the table to read as follows:§602.101 OMB Control numbers.* * * * *

David A. Mader,Acting Deputy Commissioner

of Internal Revenue.

Approved November 29, 1999

Jonathan Talisman,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on De-cember 14, 1999, 8:45 a.m., and published in theissue of the Federal Register for December 15, 1999,64 F.R. 69903)

December 27, 1999 722 1999–52 I.R.B.

(b) * * *

CFR part or section where Current OMBidentified and described control No.

* * * * *1.732-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–0099

1545–1588

* * * * *1.732-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–0074

1545–1588* * * *

Section 1361.—S CorporationDefined

26 CFR 1.1361–1: S corporation defined.

If a state law limited partnership electsunder § 301.7701–3 to be classified as anassociation taxable as a corporation, doesthe entity have more than one class ofstock for purposes of § 1361(b)(1)(D)?See Rev. Proc. 99–51, page 760.

26 CFR 601.901: Missing children shown on penaltymail.

T.D. 8848

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 601Use of Penalty Mail in the Locationand Recovery of Missing Children

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Procedural rules.

SUMMARY: This rule establishes theprocedures under which the IRS may usepenalty mail to aid in the location andrecovery of missing children. The IRScan participate in this cause as a result ofthe Juvenile Justice and DelinquencyPrevention Act of 1974. Printing picturesand biographical data of missing childrenon blank pages of annual tax forms andinstructions, taxpayer informationpublications, and other IRS products willassist the National Center for Missingand Exploited Children (NationalCenter).

DATES: Effective Date: These regulationsare effective December 13, 1999

Applicability Date:For dates of applica-bility of these regulations, see §601.901 (e).

FOR FURTHER INFORMATIONCONTACT: Concerning theregulations, Randall Hall, (202) 283-7900. Concerning the IRS’ forms andpublications program, Sandy Kopta,(202) 622-3726 (not to l l - f reenumbers).

SUPPLEMENTARY INFORMATION:

Background

On August 9, 1985, Congress enactedPublic Law 99–87, 99 Stat. 290, whichadded a new section 3220 to title 39,United States Code. That provision au-thorized Federal agencies to place pho-tographs and biographical data of missingchildren on penalty mail in accordancewith guidelines promulgated by the De-partment of Justice. On December 1,1997, Congress amended the statute toprovide that the use of missing childrenphotographs and biographical data onpenalty mail would be continued until De-cember 31, 2002.

The Office of Juvenile Justice andDelinquency Prevention (OJJDP) withinthe Department of Justice is directed by39 U.S.C. 3220 (a) (1), after consultationwith appropriate public and private agen-cies, to prescribe general guidelines underwhich penalty mail may be used to assistin the location and recovery of missingchildren. These guidelines were pub-lished on November 8, 1985 (50 FR46622). In addition, each executive de-partment of the Government of the UnitedStates is required by 39 U.S.C. 3220 (a)(2) to promulgate or authorize subunits topromulgate regulations under whichpenalty mail sent by such departmentsmay be used in conformance with theOJJDP guidelines.

This rule is being promulgated in com-pliance with 39 U.S.C. 3220 (a)(2) and isin conformance with the OJJDP guide-lines. The rule sets forth information onU.S. Postal Service restrictions on theplacement of information, “shelf-life” re-strictions on the use of missing childreninformation, and other applicable admin-istrative factors.

The IRS will receive photographic andbiographical information on missing chil-dren through the National Center. TheIRS will then give priority to the use ofmissing children information in mail ad-dressed to members of the public.

Findings and Other Matters

The Commissioner has determined thatnotice and prior public procedure are notrequired for this regulation because thesubject matter of the regulation pertainsonly to the IRS’s use of penalty mail inthe location and recovery of missing chil-dren. The regulation does not directly af-fect the rights and interests of the generalpublic. For these reasons, the rule is to beeffective on the date of publication in theFederal Register.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It also hasbeen determined that section 553 (b) ofthe Administrative Procedure Act (5U.S.C. Chapter 5) does not apply tothese regulations, and because the regu-lation does not impose a collection of in-formation on small entities, the Regula-tory Flexibility Act (5 U.S.C. Chapter 6)does not apply. Pursuant to section7805 (f) of the Internal Revenue Code,this statement of procedural rule will besubmitted to the Chief Counsel for Ad-vocacy of the Small Business Adminis-tration for comment on its impact onsmall business.

Drafting Information

The principal author of this statement ofprocedural rule is Randall Hall, Office ofChief Counsel (General Legal Services).However, other personnel from the IRSparticipated in its development.

* * * * *

Adoption of Amendments to theStatement of Procedural Rules

Accordingly, 26 CFR part 601 isamended as follows:

PART 601–STATEMENT OFPROCEDURAL RULES

Paragraph 1. The authority citation forpart 601 is revised to read as follows:

Authority: 5 U.S.C. 301 and 552, un-less otherwise noted.

Subpart I also issued under 39 U.S.C.

1999–52 I.R.B. 723 December 27, 1999

3220.Par. 2. Subpart I, consisting of

§601.901, is added to read as follows:Subpart I–Use of Penalty Mail in the

Location and Recovery of Missing Children

§601.901 Missing children shown onpenalty mail.

(a) Purpose. To support the nationaleffort to locate and recover missing chil-dren, the Internal Revenue Service (IRS)joins other executive departments andagencies of the Government of the UnitedStates in using official mail to dissemi-nate photographs and biographical infor-mation on hundreds of missing children.

(b) Procedures for obtaining and dis-seminating data.(1) The IRS shall pub-lish pictures and biographical data re-lated to missing children in domesticpenalty mail containing annual taxforms and instructions, taxpayer infor-mation publications, and other IRSproducts directed to members of the

public in the United States and its terri-tories and possessions.

(2) Missing children information shallnot be placed on the “Penalty Indicia,”“OCR Read Area,” “Bar Code ReadArea,” and “Return Address” areas of let-ter-size envelopes.

(3) The IRS shall accept photographicand biographical materials solely from theNational Center for Missing and ExploitedChildren (National Center). Photographsthat were reasonably current as of the timeof the child’s disappearance, or those whichhave been updated to reflect a missingchild’s current age through computer en-hancement technique, shall be the only ac-ceptable form of visual media or pictoriallikeness used in penalty mail.

(c) Withdrawal of data.The shelf lifeof printed penalty mail is limited to 3months for missing child cases. The IRSshall follow those guidelines wheneverpracticable. For products with an ex-tended shelf life, such as those related tofiling and paying taxes, the IRS will notprint any pictures or biographical data re-

lating to missing children without obtain-ing from the National Center a waiver ofthe 3-month shelf-life guideline.

(d) Reports and contact official.IRSshall compile and submit to OJJDP reportson its experience in implementing PublicLaw 99–87, 99 Stat. 290, as required bythat office. The IRS contact person is:Chief, Business Publications Section (orsuccessor office), Tax Forms and Publica-tions Division, Technical PublicationsBranch, OP:FS:FP:P:3, Room 5613, Inter-nal Revenue Service, 1111 ConstitutionAve., N.W., Washington, DC 20224.

(e) Period of applicability. This sec-tion is applicable December 13, 1999through December 31, 2002.

Robert E. Wenzel,Deputy Commissioner

of Internal Revenue.

(Filed by the Office of the Federal Register on De-cember 10, 1999, 8:45 a.m., and published in theissue of the Federal Register for December 13,1999, 64 F.R. 69398)

December 27, 1999 724 1999–52 I.R.B.

1999–52 I.R.B. 725 December 27, 1999

26 CFR 601.204: Changes in accounting periodsand in methods of accounting.(Also Part I, §§ 56, 162, 165, 166, 167, 168, 171,174, 197, 263, 263A, 404, 446, 451, 454, 455, 461,471, 472, 475, 481, 585, 1272, 1273, 1278, 1281,1363; 1.165–2, 1.167(a)–11, 1.167(e)–1, 1.171–4,1.174–1, 1.174–3, 1.174–4, 1.263(a)–2, 1.263A–1,1.263A–3, 1.446–1, 1.446–2, 1.451–1, 1.454–1,1.455–6, 1.461–4, 1.461–5, 1.471–1, 1.471–2,1.471–3, 1.472–6, 1.472–8, 1.481–1, 1.481–4,1.1272–1, 1.1273–1, 1.1273–2.)

Rev. Proc. 99–49

SECTION 1. PURPOSE . . . . . . . . . . . .9

SECTION 2. BACKGROUND AND CHANGES . . . . . . . . . . . . . . . . .10

.01 Change in method of accountingdefined . . . . . . . . . . . . . . . . . . .10

.02 Securing permission to make amethod change . . . . . . . . . . . . .12

.03 Terms and conditions of a methodchange . . . . . . . . . . . . . . . . . . .12

.04 No retroactive method change . . . . . . . . . . . . . . . . . . .13

.05 Method change with a § 481(a)adjustment . . . . . . . . . . . . . . . .13

(1) Need for adjustment . . . . . . .13(2) Adjustment period . . . . . . . .14

.06 Method change using a cut-offmethod . . . . . . . . . . . . . . . . . . .15

.07 Consistency and clear reflectionof income . . . . . . . . . . . . . . . . .16

.08 Separate trades or businesses .16

.09 Penalties . . . . . . . . . . . . . . . . .17

.10 Change made as part of anexamination . . . . . . . . . . . . . . .17

.11 Significant changes . . . . . . . . .18

SECTION 3. DEFINITIONS . . . . . . .20.01 Application . . . . . . . . . . . . . . .20.02 Taxpayer . . . . . . . . . . . . . . . . .20

(1) In general . . . . . . . . . . . . . . .20(2) Consolidated group . . . . . . .21

.03 Filed . . . . . . . . . . . . . . . . . . . . .21

.04 Mailed . . . . . . . . . . . . . . . . . . .21

.05 Timely performance of acts . . .22

.06 Year of change . . . . . . . . . . . . .22

.07 Section 481(a)adjustment period . . . . . . . . . . .22

.08 Under examination . . . . . . . . .22(1) In general . . . . . . . . . . . . . . .22(2) Partnerships and S corpora-

tions subject to TEFRA . . . .24.09 Issue under consideration . . . .25

(1) Under examination . . . . . . . .25(2) Before an appeals office . . . .26

(3) Before a federal court . . . . . .27.10 Change within the

LIFO inventory method . . . . . .27.11 District director . . . . . . . . . . . .27

SECTION 4. SCOPE . . . . . . . . . . . . . .27.01 Applicability . . . . . . . . . . . . . .27.02 Inapplicability . . . . . . . . . . . . .28

(1) Under examination . . . . . . . .28(2) Before an appeals office . . . .28(3) Before a federal court . . . . . .29(4) Consolidated group

member . . . . . . . . . . . . . . . . .29(5) Partnerships and

S corporations . . . . . . . . . . . .29(6) Prior change . . . . . . . . . . . . .30(7) Section 381(a) transaction . .30(8) Final year of trade

or business. . . . . . . . . . . . . . .30.03 Nonautomatic changes . . . . . .30

SECTION 5. TERMS AND CONDITIONSOF CHANGE . . . . . . . . . . . . . . . . . . . .31

.01 In general . . . . . . . . . . . . . . . . .31

.02 Year of change . . . . . . . . . . . . .31

.03 Section 481(a) adjustment . . . .31

.04 Section 481(a) adjustment period . . . . . . . . . . .31

(1) In general . . . . . . . . . . . . . . .31(2) Short period as a

separate taxable year . . . . . .32(3) Shortened or accelerated

adjustment periods . . . . . . . .32.05 NOL carryback limitation

for taxpayer subject to criminal investigation . . . . . . . . . . . . . . .38

.06Change treated as initiated by the taxpayer . . . . . .38

SECTION 6. GENERAL APPLICATIONPROCEDURES . . . . . . . . . . . . . . . . . .38

.01 Consent . . . . . . . . . . . . . . . . . .38

.02 Filing requirements . . . . . . . . .39(1) Waiver of taxable year filing re-

quirement . . . . . . . . . . . . . . .39(2) Timely duplicate

filing requirement . . . . . . . . .39(3) Label . . . . . . . . . . . . . . . . . . .40(4) Signature requirements . . . . .41(5) Where to file copy . . . . . . . . .42(6) No user fee . . . . . . . . . . . . . .44(7) Single application for certainconsolidated groups . . . . . . . . .44

.03 Taxpayer under examination . .45(1) In general . . . . . . . . . . . . . . .45(2) 90-day window period . . . . .45

(3) 120-day window period . . . .46(4) Consent of district director .47

.04 Taxpayer before an appeals office . . . . . . . . . . .48

.05 Taxpayer before a federal court . . . . . . . . . . . . .49

.06 Compliance with provisions . .50

SECTION 7. AUDIT PROTECTIONFOR TAXABLE YEARS PRIOR TOYEAR OF CHANGE . . . . . . . . . . . . .50

.01 In general . . . . . . . . . . . . . . . . .50

.02 Exceptions . . . . . . . . . . . . . . . .51(1) Change not made or

made improperly . . . . . . . . .51(2) Change in sub-method . . . . .51(3) Prior year Service-initiated

change . . . . . . . . . . . . . . . . .51(4) Criminal investigation . . . . .52

SECTION 8. EFFECT OF CONSENT . . . . . . . . . . . . . . . . . . . . .52

.01 In general . . . . . . . . . . . . . . . . .52

.02 Retroactive change or modification . . . . . . . . . . . .53

SECTION 9. REVIEW BY DISTRICTDIRECTOR . . . . . . . . . . . . . . . . . . . . .53

.01 In general . . . . . . . . . . . . . . . . .54

.02 National office consideration . . . . . . . . . . . . . .55

SECTION 10. REVIEW BY NATIONALOFFICE . . . . . . . . . . . . . . . . . . . . . . . .55

.01 In general . . . . . . . . . . . . . . . . .55

.02 Incomplete application — 30 day rule . . . . . . . . . . . . . . . .55

.03 Conference in the national office . . . . . . . . . . . . .56

.04 National office determination . . . . . . . . . . . . . .57

(1) Consent not granted . . . . . . .57(2) Application changed . . . . . .57

SECTION 11. APPLICABILITY OFREV. PROCS. 99–1 AND 99–4 . . . . .58

SECTION 12. INQUIRIES . . . . . . . . .58

SECTION 13. EFFECTIVE DATE . . .58.01 In general . . . . . . . . . . . . . . . . .58.02 Transition rules . . . . . . . . . . . .59.03 Special rules. . . . . . . . . . . . . . .59

(1) Change in method of accounting to comply with § 404(a)(11) . . . . . . . . . . . . .59

(2) Changes in methods of account-ing for rental agreements. . . .60

Part III. Administrative, Procedural, and Miscellaneous

December 27, 1999 726 1999–52 I.R.B.

(3) Change in method of accountingto discontinue the mark-to-mar-ket method of accounting . . . .60

(4) Change in method of accounting for a pool of debt instruments . . . . . . . . . . . . . .60

SECTION 14. EFFECT ON OTHERDOCUMENTS . . . . . . . . . . . . . . . . . .60

SECTION 15. PAPERWORKREDUCTION ACT . . . . . . . . . . . . . . .61

DRAFTING INFORMATION . . . . . .62

APPENDIX . . . . . . . . . . . . . . . . . . . . .64

SECTION 1. TRADE OR BUSINESSEXPENSES (§ 162) . . . . . . . . . . . . . .64

.01 Advances made by a lawyer onbehalf of clients — Description ofchange and scope . . . . . . . . . .64

.02 Year 2000 costs — Description ofchange and scope . . . . . . . . . .65

SECTION 1A. AMORTIZABLE BONDPREMIUM (§ 171) . . . . . . . . . . . . . . .65

.01 Revocation of § 171(c) election . . . . . . . . . . .65

(1) Description of change and scope . . . . . . . . .65

(2) Revocation of election . . . . .66(3) Manner of making

the change . . . . . . . . . . . . . .66(4) Additional requirements . . . .66(5) Audit protection . . . . . . . . . .67

.02 Reserved . . . . . . . . . . . . . . . . .67

SECTION 2. DEPRECIATION ORAMORTIZATION (§ 56(a)(1),56(g)(4)(A), 167, 168, OR 197, ORFORMER § 168) . . . . . . . . . . . . . . . . .67

.01 Impermissible to permissiblemethod of accounting for depreci-ation or amortization . . . . . . . .67

(1) Description of change . . . . .67(2) Scope . . . . . . . . . . . . . . . . . .68(3) Additional requirements . . . .73(4) Section 481(a) adjustment . .77(5) Basis adjustment . . . . . . . . .78(6) Meaning of depreciation

allowable . . . . . . . . . . . . . . .78.02 Permissible to permissible

method of accounting for depreciation . . . . . . . . . . . .81

(1) Description of change . . . . .82(2) Scope . . . . . . . . . . . . . . . . . .82(3) Changes covered . . . . . . . . .84(4) Additional requirements . . . .87(5) Section 481(a) adjustment . .88

.03 Sale or lease transactions . . . .89(1) Description of change

and scope . . . . . . . . . . . . . . .89(2) Manner of making

the change . . . . . . . . . . . . . .90(3) No audit protection . . . . . . .90

SECTION 2A. RESEARCH ANDEXPERIMENTAL EXPENDITURES (§ 174) . . . . . . . . . . . . . . . . . . . . . . . .90

.01 Changes to a different method or different amortization period . . . . . . . . .91

(1) Description of change . . . . .91(2) Scope . . . . . . . . . . . . . . . . . .92(3) Manner of making

the change . . . . . . . . . . . . . .93(4) Additional requirement . . . .94(5) No audit protection . . . . . . .95

.02 Reserved . . . . . . . . . . . . . . . . .95

SECTION 3. CAPITALEXPENDITURES (§ 263) . . . . . . . . .95

.01 Package design costs . . . . . . . .95(1) Description of change

and scope . . . . . . . . . . . . . . .95(2) Additional requirements . . . .96

.02 Line pack gas; cushion gas. . . .96(1) Description of change

and scope . . . . . . . . . . . . . . .96(2) Additional requirements . . . .97

SECTION 4. UNIFORMCAPITALIZATION (§ 263A) . . . . . . .97

.01 Certain uniform capitalization(UNICAP) methods used by smallresellers, formerly small resellers,and reseller-producers . . . . . . .97

(1) Description of change and scope . . . . . . . . . . . . . . .97

(2) Definitions . . . . . . . . . . . . . .99(3) Section 481(a) adjustment .100(4) No audit protection . . . . . .100(5) Example . . . . . . . . . . . . . . .100

.02 Reserved . . . . . . . . . . . . . . . .106

SECTION 4A. DEFERREDCOMPENSATION (§ 404) . . . . . . . .106

.01 Change to comply with § 404(a)(11) . . . . . . . . . . . . . .106

(1) Description of changeand scope . . . . . . . . . . . . . .107

(2) Section 481(a) adjustment period . . . . . . . . . . . . . . . . .108

(3) No audit protection . . . . . .108.02 Reserved . . . . . . . . . . . . . . . .108

SECTION 5. METHODS OFACCOUNTING (§ 446) . . . . . . . . . .108

.01 Cash or hybrid method to accrual method . . . . . . . . . . .108

(1) Description of change and scope . . . . . . . . . . . . . .108

(2) Section 481(a) adjustment . .111(3) Change to a special

method of accounting . . . . .112.02 Multi-year service

warranty contracts . . . . . . . . .112(1) Description of change

and scope . . . . . . . . . . . . . .112(2) Manner of making

the change . . . . . . . . . . . . .113.03 Multi-year insurance policies

for multi-year service warranty contracts — Description ofchange and scope . . . . . . . . .114

(1) Applicability . . . . . . . . . . . .114(2) Inapplicability . . . . . . . . . .114(3) Description of method . . . .115

.04 Interest accruals on short-termconsumer loans — Rule of 78s method . . . . . . . . .115

(1) Description of change and scope . . . . . . . . . . . . . .115

(2) Background . . . . . . . . . . . . .116(3) Manner of making

the change . . . . . . . . . . . . .117

SECTION 5A. TAXABLE YEAR OFINCLUSION (§ 451) . . . . . . . . . . . . .118

.01 Accrual of interest on nonper-forming loans . . . . . . . . . . . . .118

(1) Description of change and scope . . . . . . . . . . . . . .118

(2) Section 481(a) adjustment . . . . . . . . . . . . .119

.02 Reserved . . . . . . . . . . . . . . . .120

SECTION 6. OBLIGATIONS ISSUEDAT DISCOUNT (§ 454) . . . . . . . . . .120

.01 Series E or EE U.S. savings bonds . . . . . . . . . . . . .120

(1) Description of change and scope . . . . . . . . . . . . . .120

(2) Manner of making the change . . . . . . . . . . . . .120

.02 Reserved . . . . . . . . . . . . . . . .121

SECTION 7. PREPAID SUBSCRIPTIONINCOME (§ 455) . . . . . . . . . . . . . . . . .121

.01 Prepaid subscriptionincome . . . . . . . . . . . . . . . . . .121

(1) Description of change and scope . . . . . . . . . . . . . .122

(2) Manner of making the change . . . . . . . . . . . . .122

.02 Reserved . . . . . . . . . . . . . . . .123

1999–52 I.R.B. 727 December 27, 1999

SECTION 8. TAXABLE YEAR OFDEDUCTION (§ 461) . . . . . . . . . . . .123

.01 Timing of incurring liabilities for employee compensation . . . . . . . . . . . . .123

(1) Description of change and scope . . . . . . . . . . . . . .123

(2) Amounts taken into account 124.02 Timing of incurring liabilities for

real property taxes . . . . . . . . .124(1) Description of change . . . .125(2) Scope . . . . . . . . . . . . . . . . .125(3) Amounts taken into

account . . . . . . . . . . . . . . . .126.03 Timing of incurring liabilities

under a workers’ compensationact, tort, breach of contract, or violation of law . . . . . . . . . . .126

(1) Description of change and scope . . . . . . . . . . . . . .126

(2) Amounts taken into account . . . . . . . . . . . . . . . .127

.04 Timing of incurring liabilities for payroll taxes . . . . . . . . . .128

(1) Applicability . . . . . . . . . . . .128(2) Inapplicability . . . . . . . . . .130(3) Recurring item exception . .130(4) Amounts taken into

account . . . . . . . . . . . . . . . .130.05 Cooperative advertising . . . .131

(1) Description of change and scope . . . . . . . . . . . . . .131

(2) Scope limitations inapplicable . . . . . . . . . . . .131

SECTION 8A. CERTAIN PAYMENTSFOR THE USE OF PROPERTY ORSERVICES (§ 467) . . . . . . . . . . . . . .132

.01 Change to constant rental accrual method. . . . . . . . . . . .132

(1) Description of change. . . . .132(2) Requirements. . . . . . . . . . . .132(3) Scope limitations

inapplicable. . . . . . . . . . . . .132.02 Change to comply with §§ 1.467–1

through 1.467–7. . . . . . . . . . .133(1) Description of change. . . . .133(2) Requirements . . . . . . . . . . .133(3) Scope limitations

inapplicable. . . . . . . . . . . . .133(4) Manner of making

the change. . . . . . . . . . . . . .133.03 Change to comply with regulation

project IA–292–84. . . . . . . . .134(1) Description of

the change. . . . . . . . . . . . . .134(2) Requirements. . . . . . . . . . . .134(3) Scope limitations

inapplicable. . . . . . . . . . . . .134

SECTION 9. INVENTORIES (§ 471) . . . . . . . . . . . . . . . . . . .135

.01 Cash discounts — Description ofchange and scope . . . . . . . . .135

.02 Estimating inventory “shrinkage” . . . . . . . . . . . . . .135

(1) Description of change and scope . . . . . . . . . . . . . .135

(2) Scope limitations inapplicable . . . . . . . . . . . .136

(3) Additional requirements . . .136(4) Audit protection . . . . . . . . .137(5) Future change . . . . . . . . . .137

SECTION 10. LAST-IN, FIRST-OUT(LIFO) INVENTORIES (§ 472) . . . .137

.01 Change from the LIFO inventory method . . . . . . . . . .137

(1) Description of changeand scope . . . . . . . . . . . . . .137

(2) Limitation on LIFO election . . . . . . . . . . . . . . . .140

(3) Effect of subchapter S election by corporation . . .140

(4) Additional requirements . . .142.02 Determining the cost of

used vehicles purchased or taken as a trade-in . . . . . . . . .142

(1) Description of change and scope . . . . . . . . . . . . . .142

(2) Manner of making the change . . . . . . . . . . . . .143

.03 Alternative LIFO inventory methodfor retail automobile dealers . .143

(1) Description of changeand scope . . . . . . . . . . . . . .143

(2) Manner of making the change . . . . . . . . . . . . .144

.04 Inventory price index computation(IPIC) method under the LIFO inventory method . . . . .145

(1) Description of change and scope . . . . . . . . . . . . . .145

(2) Manner of making the change . . . . . . . . . . . . .147

(3) Bargain purchase . . . . . . . .147.05 Determining current-year

cost under the LIFO inventory method . . . . . . . . . .148

(1) Description of change and scope . . . . . . . . . . . . . .148

(2) Manner of making the change . . . . . . . . . . . . .149

SECTION 10A. MARK-TO-MARKETACCOUNTING METHOD FOR DEALERS IN SECURITIES (§ 475) . . . . . . . . . . . . . . . . . . . . . . . .149

.01 Discontinuing the mark-to-marketmethod of accounting fornonfinancial customer paper . . .149

(1) Description of change and scope . . . . . . . . . . . . . .149

(2) Additional Requirements . .150(3) No audit protection . . . . . .150

.02 Commodities dealers, securitiestraders, and commodities traderselecting to use the mark-to-marketmethod of accounting under § 475(e) or (f). . . . . . . . . . . . .151

(1) Description of change . . . .151(2) Scope . . . . . . . . . . . . . . . . .151

SECTION 11. BANK RESERVES FORBAD DEBTS (§ 585) . . . . . . . . . . . .152

.01 Changing from the § 585 reservemethod to the § 166 specific charge-off method . . . . . . . . .152

(1) Description of change and scope . . . . . . . . . . . . . .153

(2) Section 481(a) adjustment . . . . . . . . . . . . .153

(3) Change from § 585 requiredwhen electing S corporation status . . . . . . . . . . . . . . . . .154

.02 Reserved . . . . . . . . . . . . . . . .155

SECTION 12. ORIGINAL ISSUEDISCOUNT (§§ 1272; 1273) . . . . . .155

.01 De minimis original issue discount (OID) . . . . . . . . . . . .155

(1) Description of change and scope . . . . . . . . . . . . . .155

(2) Manner of making the change . . . . . . . . . . . . .156

(3) Additional requirements . . .156(4) No audit protection . . . . . .157

.02 Pool of debt instruments . . . .157(1) Description of change

and scope . . . . . . . . . . . . . .157(2) Additional requirements . . .160

SECTION 12A. MARKET DISCOUNTBONDS (§ 1278) . . . . . . . . . . . . . . . .160

.01 Revocation of § 1278(b) election . . . . . . . . . . . . . . . . .160

(1) Description of change and scope . . . . . . . . . . . . . .160

(2) Revocation of election . . . .160(3) Manner of making

the change . . . . . . . . . . . . .161(4) Additional requirements . . .161(5) Audit protection . . . . . . . . .162

.02 Reserved . . . . . . . . . . . . . . . .162

December 27, 1999 728 1999–52 I.R.B.

SECTION 13. SHORT-TERMOBLIGATIONS (§ 1281) . . . . . . . . .162

.01 Interest income on short-term obligations . . . . . .162

(1) Description of change and scope . . . . . . . . . . . . . .162

(2) Section 481(a) adjustment period . . . . . . . . . . . . . . . . .164

.02 Stated interest on short-term loansof cash method banks in the Eighth Circuit . . . . . . . . . . . .164

(1) Description of change and scope . . . . . . . . . . . . . .164

(2) Section 481(a) adjustment period . . . . . . . . . . . . . . . . .165

(3) No ruling protection . . . . . .165

SECTION 1. PURPOSEThis revenue procedure provides the

procedures by which a taxpayer may ob-tain automatic consent to change the meth-ods of accounting described in the AP-PENDIX of this revenue procedure. Thisrevenue procedure clarifies, modifies, am-plifies, and supersedes Rev. Proc. 98–60,1998–51 I.R.B. 16. It also consolidates au-tomatic consent procedures for changes inseveral methods of accounting that werepublished subsequent to the publication ofRev. Proc. 98–60, and provides new auto-matic consent procedures for changes inseveral other methods of accounting. Ataxpayer complying with all the applicableprovisions of this revenue procedure hasobtained the consent of the Commissionerof Internal Revenue to change its methodof accounting under § 446(e) of the Inter-nal Revenue Code and the Income TaxRegulations thereunder.

SECTION 2. BACKGROUND ANDCHANGES.01 Change in method of accounting

defined.(1) Section 1.446–1(e)(2)(ii)(a) of

the Income Tax Regulations provides thata change in method of accounting in-cludes a change in the overall plan of ac-counting for gross income or deductions,or a change in the treatment of any mater-ial item. A material item is any item thatinvolves the proper time for the inclusionof the item in income or the taking of theitem as a deduction. In determiningwhether a taxpayer’s accounting practicefor an item involves timing, generally therelevant question is whether the practicepermanently changes the amount of the

taxpayer’s lifetime income. If the prac-tice does not permanently affect the tax-payer’s lifetime income, but does or couldchange the taxable year in which incomeis reported, it involves timing and istherefore a method of accounting. SeeRev. Proc. 91–31, 1991–1 C.B. 566.

(2) Although a method of accountingmay exist under this definition without apattern of consistent treatment of an item,a method of accounting is not adopted inmost instances without consistent treat-ment. The treatment of a material item inthe same way in determining the gross in-come or deductions in two or more con-secutively filed tax returns (without re-gard to any change in status of the methodas permissible or impermissible) repre-sents consistent treatment of that item forpurposes of § 1.446–1(e)(2)(ii)(a). If ataxpayer treats an item properly in thefirst return that reflects the item, however,it is not necessary for the taxpayer to treatthe item consistently in two or more con-secutive tax returns to have adopted amethod of accounting. If a taxpayer hasadopted a method of accounting underthese rules, the taxpayer may not changethe method by amending its prior incometax return(s). SeeRev. Rul. 90–38,1990–1 C.B. 57.

(3) A change in the characterizationof an item may also constitute a change inmethod of accounting if the change hasthe effect of shifting income from one pe-riod to another. For example, a changefrom treating an item as income to treatingthe item as a deposit is a change in methodof accounting. SeeRev. Proc. 91–31.

(4) A change in method of account-ing does not include correction of mathe-matical or posting errors, or errors in thecomputation of tax liability (such as er-rors in computation of the foreign taxcredit, net operating loss, percentage de-pletion, or investment credit). See§1.446–1(e)(2)(ii)(b).

.02 Securing permission to make amethod change.Sections 446(e) and1.446–1(e) state that, except as otherwiseprovided, a taxpayer must secure the con-sent of the Commissioner before chang-ing a method of accounting for federal in-come tax purposes. Section1.446–1(e)(3)(i) requires that, in order toobtain the Commissioner’s consent to amethod change, a taxpayer must file aForm 3115, Application for Change in

Accounting Method, during the taxableyear in which the taxpayer wants to makethe proposed change.

.03 Terms and conditions of a methodchange. Section 1.446–1(e)(3)(ii) autho-rizes the Commissioner to prescribe ad-ministrative procedures setting forth thelimitations, terms, and conditions deemednecessary to permit a taxpayer to obtainconsent to change a method of accountingin accordance with § 446(e). The termsand conditions the Commissioner mayprescribe 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 theCommissioner, a taxpayer may not re-quest, or otherwise make, a retroactivechange in method of accounting, regard-less of whether the change is from a per-missible or an impermissible method. SeegenerallyRev. Rul. 90–38.

.05 Method change with a § 481(a)adjustment.

(1) Need for adjustment. Section481(a) requires those adjustments neces-sary to prevent amounts from being dupli-cated or omitted to be taken into accountwhen the taxpayer’s taxable income iscomputed under a method of accountingdifferent from the method used to computetaxable income for the preceding taxableyear. When there is a change in method ofaccounting to which § 481(a) is applied,income for the taxable year preceding theyear of change must be determined underthe method of accounting that was thenemployed, and income for the year ofchange and the following taxable yearsmust be determined under the new methodof accounting as if the new method had al-ways been used.

Example. A taxpayer that is not required to useinventories uses the overall cash receipts and dis-bursements method and changes to an overall ac-crual method. The taxpayer has $120,000 of incomeearned 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 yearpreceding the year of change. A positive § 481(a)adjustment of $20,000 ($120,000 accounts receiv-able less $100,000 accounts payable) is required as aresult of the change.

(2) Adjustment period. Section481(c) and §§ 1.446–1(e)(3)(ii) and1.481–4 provide that the adjustment re-quired by § 481(a) may be taken into ac-count in determining taxable income in

1999–52 I.R.B. 729 December 27, 1999

the manner and subject to the conditionsagreed to by the Commissioner and thetaxpayer. Generally, in the absence ofsuch an agreement, the § 481(a) adjust-ment is taken into account completely inthe year of change, subject to § 481(b)which limits the amount of tax where the§ 481(a) adjustment is substantial. How-ever, under the Commissioner’s authorityin § 1.446–1(e)(3)(ii) to prescribe termsand conditions for changes in methods ofaccounting, this revenue procedure pro-vides specific adjustment periods that areintended to achieve an appropriate bal-ance between the goals of mitigating dis-tortions of income that result from ac-counting method changes and providingappropriate incentives for voluntary com-pliance.

.06 Method change using a cut-offmethod. The Commissioner may deter-mine that certain changes in methods ofaccounting will be made without a §481(a) adjustment, using a “cut-offmethod.” Under a cut-off method, onlythe items arising on or after the beginningof the year of change (or other operativedate) are accounted for under the newmethod of accounting. Any items arisingbefore the year of change (or other opera-tive date) continue to be accounted forunder the taxpayer’s former method of ac-counting. See, for example, § 263A(which generally applies to costs incurredafter December 31, 1986, for noninven-tory property), § 461(h) (which generallyapplies to amounts incurred on or afterJuly 18, 1984), and § 1.446–3 (which ap-plies to notional principal contracts en-tered into on or after December 13, 1993).Because no items are duplicated or omit-ted from income when a cut-off method isused to effect a change in accountingmethod, no § 481(a) adjustment is neces-sary.

.07 Consistency and clear reflection ofincome. Methods of accounting shouldclearly reflect income on a continuingbasis, and the Internal Revenue Serviceexercises its discretion under §§ 446(e)and 481(c) in a manner that generallyminimizes distortions of income acrosstaxable years and on an annual basis.

.08 Separate trades or businesses.(1) Sections 1.446–1(d)(1) and (2)

provide that when a taxpayer has two ormore separate and distinct trades or busi-nesses, a different method of accounting

may be used for each trade or businessprovided the method of accounting usedfor each trade or business clearly reflectsthe overall income of the taxpayer as wellas that of each particular trade or busi-ness. No trade or business is separate anddistinct unless a complete and separableset of books and records is kept for thattrade or business.

(2) Section 1.446–1(d)(3) providesthat if, by reason of maintaining differentmethods of accounting, there is a creationor shifting of profits or losses between thetrades or businesses of the taxpayer (forexample, through inventory adjustments,sales, purchases, or expenses) so that in-come of the taxpayer is not clearly re-flected, the trades or businesses of thetaxpayer are not separate and distinct.

.09 Penalties.Any otherwise applica-ble penalty for the failure of a taxpayer tochange its method of accounting (for ex-ample, the accuracy-related penalty under§ 6662 or the fraud penalty under § 6663)may be imposed if the taxpayer does nottimely file a request to change a methodof accounting. See§ 446(f). Addition-ally, the taxpayer’s return preparer mayalso be subject to the preparer penaltyunder § 6694. However, penalties willnot be imposed when a taxpayer changesfrom an impermissible method of ac-counting to a permissible one by comply-ing with all applicable provisions of thisrevenue procedure.

.10 Change made as part of an exami-nation. Sections 446(b) and 1.446–1(b)(1)provide that if a taxpayer does not regularlyemploy a method of accounting that clearlyreflects its income, the computation of tax-able income must be made in a mannerthat, in the opinion of the Commissioner,does clearly reflect income. If a taxpayerunder examination is not eligible to changea method of accounting under this revenueprocedure, the change may be made by thedistrict director. A change resulting in apositive § 481(a) adjustment will ordinarilybe made in the earliest taxable year underexamination with a one-year § 481(a) ad-justment period.

.11 Significant changes.Significantchanges to Rev. Proc. 98–60 include:

(1) The term “district director” isnow defined in new section 3.11 to in-clude the district director or other appro-priate examining office or official. Thischange was made to accommodate antici-

pated future changes in the organizationalstructure of the Internal Revenue Service.

(2) Section 4.02 is modified by theaddition of section 4.02(8), which pro-vides that this revenue procedure does notapply if the taxpayer would be required toaccelerate the § 481(a) adjustment in theyear of change. This scope limitationdoes not apply to changes of accountingmethod under sections 2.01 and 2.02 ofthe APPENDIX of this revenue proce-dure.

(3) The additional statement requiredby section 6.02(5) of Rev. Proc. 98–60has been discontinued. Elimination ofthis statement does not otherwise changethe responsibility of a taxpayer seekingautomatic consent to comply with all theapplicable provisions of this revenue pro-cedure. See sections 5.01, 6.01, 6.06 and10.04(1) of this revenue procedure.

(4) Section 6.03(4) clarifies that theoffice conducting the examination givesconsent to the filing of the application,rather than to the change itself. This isconsistent with the current authority ofsuch office, upon examination, to denythe change if the taxpayer fails to complywith all the applicable provisions of thisrevenue procedure. Seesection 6.06 ofthis revenue procedure.

(5) Sections 2.01 and 2.02 of the AP-PENDIX are modified to include certainchanges in method of accounting for de-preciation or amortization for purposes ofcomputing alternative minimum taxableincome and adjusted current earningsunder § 56.

(6) Section 5.01 of the APPENDIXis modified to permit a taxpayer requiredto use an inventory method of accountingto change to an overall accrual method,provided the taxpayer uses a proper in-ventory method and either is a small re-seller or is eligible to use the simplifiedresale method;

(7) Section 5.01 of the APPENDIX ismodified to provide that the change doesnot apply to a taxpayer with two or moretrades or businesses, unless the taxpayeruses or adopts the same overall accrualmethod for each such trade or business.

(8) Section 8.04 of the APPENDIXis modified to include changes in themethod of accounting for state unemploy-ment taxes and railroad retirement taxes.

(9) The following changes in meth-ods of accounting have been added to the

December 27, 1999 730 1999–52 I.R.B.

APPENDIX of this revenue procedure:(a) Section 1A.01 of the APPEN-

DIX regarding the revocation of a §171(c) election;

(b) Section 4A.01 of the APPEN-DIX regarding deferred compensation;

(c) Section 5A.01 of the APPEN-DIX regarding accrual of interest on non-performing loans;

(d) Sections 8A.01, 8A.02, and8A.03 of the APPENDIX regarding § 467rental agreements;

(e) Section 10A.02 regarding elec-tions to use the mark-to-market method ofaccounting under § 475(e) or (f).

(f) Section 12A.01 of the APPEN-DIX regarding the revocation of a §1278(b) election.

SECTION 3. DEFINITIONS.01 Application. The term “applica-

tion” includes a Form 3115, or any state-ment that is authorized under the APPEN-DIX of this revenue procedure to be filedin lieu of a Form 3115, and any attach-ments.

.02 Taxpayer.(1) In general. The term “taxpayer”

has the same meaning as the term “per-son” defined in § 7701(a)(1) (rather thanthe meaning of the term “taxpayer” de-fined in § 7701(a)(14)).

(2) Consolidated group.For pur-poses of (a) sections 3.08(1), 3.09(1), and4.02(1) of this revenue procedure (tax-payer under examination), (b) sections3.09(2) and 4.02(2) of this revenue proce-dure (taxpayer before an appeals office),or (c) sections 3.09(3) and 4.02(3) of thisrevenue procedure (taxpayer before a fed-eral court), the term “taxpayer” includes aconsolidated group.

.03 Filed. Any form (including an ap-plication), statement, or other documentrequired to be filed under this revenueprocedure is filed on the date it is mailedto the proper address (or an address simi-lar enough to complete delivery). If theform, statement, or other document is notmailed (or the date it is mailed cannot bereasonably determined), it is filed on thedate it is delivered to the Service.

.04 Mailed. The date of mailing willbe determined under the rules of § 7502.For example, the date of mailing is thedate of the U.S. postmark or the applica-ble date recorded or marked by a desig-nated private delivery service. SeeNotice

99– 41, 1999–35 I.R.B. 325..05 Timely performance of acts.The

rules of § 7503 apply when the last dayfor the taxpayer’s timely performance ofany act (for example, filing an applicationor submitting additional information) fallson a Saturday, Sunday, or legal holiday.The performance of any act is timely ifthe act is performed on the next succeed-ing day that is not a Saturday, Sunday, orlegal holiday.

.06 Year of change.The year ofchange is the taxable year for which achange in method of accounting is effec-tive, that is, the first taxable year the newmethod is to be used, even if no affecteditems are taken into account for that year.

.07 Section 481(a) adjustment period.The § 481(a) adjustment period is the ap-plicable number of taxable years for tak-ing into account the § 481(a) adjustmentrequired as a result of the change inmethod of accounting. The year ofchange is the first taxable year in the ad-justment period and the § 481(a) adjust-ment is taken into account ratably overthe number of taxable years in the adjust-ment period. The applicable adjustmentperiods are set forth in section 5.04 of thisrevenue procedure.

.08 Under examination.(1) In general.(a) Except as provided in section

3.08(2) of this revenue procedure, an ex-amination of a taxpayer with respect to afederal income tax return begins on thedate the taxpayer is contacted in any man-ner by a representative of the Service forthe purpose of scheduling any type of ex-amination of the return. An examinationends:

(i) in a case in which the Ser-vice accepts the return as filed, on thedate of the “no change” letter sent to thetaxpayer;

(ii) in a fully agreed case, on theearliest of the date the taxpayer executes awaiver of restrictions on assessment oracceptance of overassessment (for exam-ple, Form 870, 4549, or 4605), the datethe taxpayer makes a payment of tax thatequals or exceeds the proposed defi-ciency, or the date of the “closing” letter(for example, Letter 891 or 987) sent tothe taxpayer; or

(iii) in an unagreed or a par-tially agreed case, on the earliest of thedate the taxpayer (or its representative) is

notified by Appeals that the case has beenreferred by the examining agent(s) to Ap-peals, the date the taxpayer files a petitionin the Tax Court, the date on which theperiod for filing a petition with the TaxCourt expires, or the date of the notice ofclaim disallowance.

(b) An examination does not endas a result of the early referral of an issueto Appeals under the provisions of Rev.Proc. 96–9, 1996–1 C.B. 575.

(c) An examination resumes onthe date the taxpayer (or its representa-tive) is notified by Appeals (or otherwise)that the case has been referred to the ex-amining agent(s) for reconsideration.

(2) Partnerships and S corporationssubject to TEFRA. For an entity (includ-ing a limited liability company), treatedas a partnership or an S corporation forfederal income tax purposes, that is sub-ject to the TEFRA unified audit and litiga-tion provisions for partnerships and S cor-porations, an examination begins on thedate of the notice of the beginning of anadministrative proceeding sent to the TaxMatters Partner/Tax Matters Person(TMP). An examination ends:

(a) in a case in which the Serviceaccepts the partnership or S corporationreturn as filed, on the date of the “no ad-justments” letter or the “no change” no-tice of final administrative adjustmentsent to the TMP;

(b) in a fully agreed case, when allthe partners, members, or shareholders exe-cute a Form 870–P, 870-L, or 870-S; or

(c) in an unagreed or a partiallyagreed case, on the earliest of the date theTMP (or its representative) is notified byAppeals that the case has been referred bythe examining agent(s) to Appeals, thedate the TMP (or a partner, member, orshareholder) requests judicial review, orthe date on which the period for request-ing judicial review expires. But see sec-tion 4.02(5) of this revenue procedure forcertain rules that preclude an entity fromrequesting a change in accountingmethod. Also note that S corporations arenot subject to the TEFRA unified auditand litigation provisions for taxable yearsbeginning after December 31, 1996. SeeSmall Business Job Protection Act of1996, Pub. L. No. 104–188, § 1317(a),110 Stat. 1755, 1787 (1996).

.09 Issue under consideration.(1) Under examination.A taxpayer’s

1999–52 I.R.B. 731 December 27, 1999

method of accounting for an item is anissue under consideration for the taxableyears under examination if the taxpayerreceives written notification (for example,by examination plan, information docu-ment request (IDR), or notification ofproposed adjustments or income tax ex-amination changes) from the examiningagent(s) specifically citing the treatmentof the item as an issue under considera-tion. For example, a taxpayer’s methodof pooling under the dollar-value, last-in,first-out (LIFO) inventory method is anissue under consideration as a result of anexamination plan that identifies LIFOpooling as a matter to be examined, but itis not an issue under consideration as a re-sult of an examination plan that merelyidentifies LIFO inventories as a matter tobe examined. Similarly, a taxpayer’smethod of determining inventoriablecosts under § 263A is an issue under con-sideration as a result of an IDR that re-quests documentation supporting thecosts included in inventoriable costs, butit is not an issue under consideration as aresult of an IDR that requests documenta-tion supporting the amount of cost ofgoods sold reported on the return. Thequestion of whether a method of account-ing is an issue under consideration may bereferred to the national office as a requestfor technical advice under the provisionsof Rev. Proc. 99–2, 1999–1 I.R.B. 73 (orany successor).

(2) Before an appeals office. A tax-payer’s method of accounting for an itemis an issue under consideration for the tax-able years before an appeals office if thetreatment of the item is included as anitem of adjustment in the examination re-port referred to Appeals or is specificallyidentified in writing to the taxpayer byAppeals.

(3) Before a federal court. A tax-payer’s method of accounting for an itemis an issue under consideration for the tax-able years before a federal court if thetreatment of the item is included in thestatutory notice of deficiency, the noticeof claim disallowance, the notice of finaladministrative adjustment, the pleadings(for example, the petition, complaint, oranswer) or amendments thereto, or isspecifically identified in writing to thetaxpayer by the counsel for the govern-ment.

.10 Change within the LIFO inventorymethod.A change within the LIFO inven-tory method is a change from one LIFOinventory method or sub-method to an-other LIFO inventory method or sub-method. A change within the LIFO in-ventory method does not include a changein method of accounting that could bemade by a taxpayer that does not use theLIFO inventory method (for example, amethod governed by § 471 or 263A). .11 District director. The term “dis-

trict director” includes the district directoror other appropriate examining office orofficial.

SECTION 4. SCOPE.01 Applicability. This revenue proce-

dure applies to a taxpayer requesting theCommissioner’s consent to change to amethod of accounting described in theAPPENDIX of this revenue procedure.This revenue procedure is the exclusiveprocedure for a taxpayer within its scopeto obtain the Commissioner’s consent.

.02 Inapplicability. Except as other-wise provided in the APPENDIX of thisrevenue procedure (see, for example, sec-tions 4.01, 4A.01, 5.04, 8.05, 9.02,10A.01, 12.01, and 12.02 of the APPEN-DIX of this revenue procedure), this rev-enue procedure does not apply in the fol-lowing situations:

(1) Under examination. If, on thedate the taxpayer would otherwise file acopy of the application with the nationaloffice, the taxpayer is under examination(as provided in section 3.08 of this rev-enue procedure), except as provided insections 6.03(2) (90-day window),6.03(3) (120-day window), and 6.03(4)(examination officials consent) of thisrevenue procedure;

(2) Before an appeals office. If, onthe date the taxpayer would otherwise filea copy of the application with the nationaloffice, the taxpayer is before an appealsoffice with respect to any income taxissue and the method of accounting to bechanged is an issue under considerationby the appeals office (as provided in sec-tion 3.09(2) of this revenue procedure);

(3) Before a federal court. If, on thedate the taxpayer would otherwise file acopy of the application with the nationaloffice, the taxpayer is before a federalcourt with respect to any income tax issueand the method of accounting to be

changed is an issue under considerationby the federal court (as provided in sec-tion 3.09(3) of this revenue procedure);

(4) Consolidated group member.Acorporation that is (or was formerly) amember of a consolidated group is underexamination, before an appeals office, orbefore a federal court (for purposes ofsections 4.02(1), (2), and (3) of this rev-enue procedure) if the consolidated groupis under examination, before an appealsoffice, or before a federal court for a tax-able year(s) that the corporation was amember of the group;

(5) Partnerships and S corporations.For an entity (including a limited liabilitycompany) treated as a partnership or an Scorporation for federal income tax pur-poses, if, on the date the entity would oth-erwise file a copy of the application withthe national office, the entity’s accountingmethod to be changed is an issue underconsideration in an examination of a part-ner, member, or shareholder’s federal in-come tax return or an issue under consid-eration by an appeals office or by afederal court with respect to a partner,member, or shareholder’s federal incometax return;

(6) Prior change. If the taxpayer,within the last five taxable years (includ-ing the year of change), (a) has made achange in the same method of accounting(with or without obtaining the Commis-sioner’s consent), or (b) has applied tochange the same method of accountingwithout effecting the change (whether, forexample, the application to change waswithdrawn, not perfected, not granted, ordenied);

(7) Section 381(a) transaction. Ifthe taxpayer engages in a transaction towhich § 381(a) applies within the pro-posed taxable year of change (determinedwithout regard to any potential closing ofthe year under § 381(b)(1)); or

(8) Final year of trade or business.If the taxpayer would be required by sec-tion 5.04(3)(c) of this revenue procedureto take the entire amount of the § 481(a)adjustment into account in computing tax-able income for the year of change.

.03 Nonautomatic changes. If a tax-payer is precluded by other than sections4.02(1) through 4.02(5) of this revenueprocedure from using this revenue proce-dure to make a change in method of ac-counting, the taxpayer requesting such a

December 27, 1999 732 1999–52 I.R.B.

change must file a Form 3115 with theCommissioner in accordance with the re-quirements of § 1.446–1(e)(3)(i) and Rev.Proc. 97–27, 1997–1 C.B. 680 (or anyother applicable Code, regulation, or ad-ministrative provision).

SECTION 5. TERMS ANDCONDITIONS OF CHANGE

.01 In general. An accounting methodchange filed under this revenue proceduremust be made pursuant to the terms andconditions provided in this revenue proce-dure.

.02 Year of change.The year of changeis the taxable year designated on the ap-plication and for which the application istimely filed under section 6.02(2).

.03 Section 481(a) adjustment.Unlessotherwise provided in this revenue proce-dure, a taxpayer making a change inmethod of accounting under this revenueprocedure must take into account a §481(a) adjustment in the manner providedin section 5.04 of this revenue procedure.

.04 Section 481(a) adjustment period.(1) In general. Except as otherwise

provided in section 5.04(3) or the AP-PENDIX of this revenue procedure, the §481(a) adjustment period for positive andnegative § 481(a) adjustments is four tax-able years.

(2) Short period as a separate tax-able year. If the year of change, or anytaxable year during the § 481(a) adjust-ment period, is a short taxable year, the §481(a) adjustment must be included in in-come as if that short taxable year were afull 12-month taxable year. SeeRev. Rul.78–165, 1978–1 C.B. 276.

Example 1. A calendar year taxpayer receivedpermission to change an accounting method begin-ning with the 1999 calendar year. The § 481(a) ad-justment is $30,000 and the adjustment period isfour taxable years. The taxpayer subsequently re-ceives permission to change its annual accountingperiod to September 30, effective for the taxableyear ending September 30, 2000. The taxpayer mustinclude $7,500 of the § 481(a) adjustment in grossincome for the short period from January 1, 2000,through September 30, 2000.

Example 2. Corporation X, a calendar year tax-

payer, received permission to change an accounting

method beginning with the 1999 calendar year. The

§ 481(a) adjustment is $30,000 and the adjustment

period is four taxable years. On July 1, 2001, Cor-

poration Z acquires Corporation X in a transaction to

which § 381(a) applies. Corporation Z is a calendar

year taxpayer that uses the same method of account-

ing to which Corporation X changed in 1999. Cor-

poration X must include $7,500 of the § 481(a) ad-

justment in gross income for its short period income

tax return for January 1, 2001, through June 30,

2001. In addition, Corporation Z must include

$7,500 of the § 481(a) adjustment in gross income in

its income tax return for calendar year 2001.

(3) Shortened or accelerated adjust-ment periods. The § 481(a) adjustmentperiod provided in section 5.04(1) or theAPPENDIX of this revenue procedurewill be shortened or accelerated in the fol-lowing situations.

(a) De minimis rule. A taxpayermay elect to use a one-year adjustmentperiod in lieu of the § 481(a) adjustmentperiod otherwise provided by this revenueprocedure if the entire § 481(a) adjust-ment is less than $25,000 (either positiveor negative). A taxpayer makes an elec-tion under this de minimisrule by so indi-cating on the application. For example,for a taxpayer filing a Form 3115, the tax-payer must complete the appropriate lineon the Form 3115 to elect this de minimisrule.

(b) Cooperatives.A cooperativewithin the meaning of § 1381(a) generallymust take the entire amount of a § 481(a)adjustment into account in computing tax-able income for the year of change. SeeRev. Rul. 79–45, 1979–1 C.B. 284.

(c) Ceasing to engage in the tradeor business.

(i) In general. A taxpayer thatceases to engage in a trade or business orterminates its existence must take the re-maining balance of any § 481(a) adjust-ment relating to the trade or business intoaccount in computing taxable income inthe taxable year of the cessation or termi-nation. Except as provided in sections5.04(3)(c)(iv) and (v) of this revenue pro-cedure, a taxpayer is treated as ceasing toengage in a trade or business if the opera-tions of the trade or business cease or sub-stantially all the assets of the trade or busi-ness are transferred to another taxpayer.For this purpose, “substantially all” hasthe same meaning as in section 3.01 ofRev. Proc. 77–37, 1977–2 C.B. 568.

(ii) Examples of transactionsthat are treated as the cessation of a tradeor business. The following is a nonexclu-sive list of transactions that are treated asthe cessation of a trade or business forpurposes of accelerating the § 481(a) ad-justment under section 5.04(3)(c) of thisrevenue procedure:

(A) the trade or business towhich the § 481(a) adjustment relates isincorporated;

(B) the trade or business towhich the § 481(a) adjustment relates ispurchased by another taxpayer in a trans-action to which § 1060 applies;

(C) the trade or business towhich the § 481(a) adjustment relates isterminated or transferred pursuant to ataxable liquidation;

(D) a division of a corpora-tion ceases to operate the trade or busi-ness to which the § 481(a) adjustmentrelates; or

(E) the assets of a trade orbusiness to which the § 481(a) adjust-ment relates are contributed to a partner-ship.

(iii) Conversion to or from Scorporation status. Except as provided insection 10.01 of the APPENDIX of thisrevenue procedure, no acceleration of a §481(a) adjustment is required under sec-tion 5.04(3)(c) of this revenue procedurewhen a C corporation elects to be treatedas an S corporation or an S corporationterminates its S election and is thentreated as a C corporation.

(iv) Certain transfers to which§ 381(a) applies.No acceleration of the §481(a) adjustment is required under sec-tion 5.04(3)(c) of this revenue procedurewhen a taxpayer transfers substantially allthe assets of the trade or business thatgave rise to the § 481(a) adjustment to an-other 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 iscarried over and used by the acquiringcorporation immediately after the transferpursuant to § 381(c). The acquiring cor-poration is subject to any terms and con-ditions imposed on the transferor (or anypredecessor of the transferor) as a resultof its change in method of accounting.

(v) Certain transfers pursuantto § 351 within a consolidated group.

(A) In general. No accelera-tion of the § 481(a) adjustment is requiredunder section 5.04(3)(c) of this revenueprocedure when one member of an affiliat-ed group filing a consolidated return trans-fers substantially all the assets of the tradeor business that gave rise to the § 481(a)adjustment to another member of the sameconsolidated group in an exchange quali-

1999–52 I.R.B. 733 December 27, 1999

fying under § 351 and the transferee mem-ber adopts and uses the same method ofaccounting (the change to which gave riseto the § 481(a) adjustment) used by thetransferor member. The transferor mem-ber must continue to take the § 481(a)adjustment into account pursuant to theterms and conditions set forth in this rev-enue procedure. The transferor membermust take into account activities of thetransferee member (or any successor) indetermining whether acceleration of the §481(a) adjustment is required. For exam-ple, except as provided in the followingsentence, the transferor member must takeany remaining § 481(a) adjustment intoaccount in computing taxable income inthe taxable year in which the transfereemember ceases to engage in the trade orbusiness to which the § 481(a) adjustmentrelates. The § 481(a) adjustment is notaccelerated when the transferee memberengages in a transaction described in sec-tion 5.04(3)(c)(iv) or 5.04(3)(c)(v)(A) ofthis revenue procedure.

(B) Exception.The provi-sions of section 5.04(3)(c)(v)(A) of thisrevenue procedure cease to apply and thetransferor member must take any remain-ing balance of the § 481(a) adjustmentinto account in the taxable year immedi-ately preceding any of the following: (1)the taxable year the transferor memberceases to be a member of the group; (2)the taxable year any transferee memberowning substantially all the assets of thetrade or business which gave rise to the §481(a) adjustment ceases to be a memberof the group; or (3) a separate return yearof the common parent of the group. Inapplying the preceding sentence, the rulesof paragraphs (j)(2), (j)(5), and (j)(6) of §1.1502–13 apply, but only if the methodof accounting to which the transferormember changed and to which the §481(a) adjustment relates is adopted, car-ried over, or used by any transferee mem-ber acquiring the assets of the trade orbusiness that gave rise to the § 481(a)adjustment immediately after acquisitionof such assets. For example, the transfer-or member is not required to acceleratethe § 481(a) adjustment if a transfereemember ceases to be a member of a con-solidated group by reason of an acquisi-tion to which § 381(a) applies and theacquiring corporation (1) is a member ofthe same group as the transferor member,

and (2) continues, under § 381(c)(4) andthe regulations thereunder, to use thesame method of accounting as that usedby the transferor member with respect tothe assets of the trade or business towhich the § 481(a) adjustment relates.

.05 NOL carryback limitation for tax-payer subject to criminal investigation.Generally, no portion of any net operatingloss that is attributable to a negative §481(a) adjustment may be carried back toa taxable year prior to the year of changethat is the subject of any pending or futurecriminal investigation or proceeding con-cerning (1) directly or indirectly, anyissue relating to the taxpayer’s federal taxliability, or (2) the possibility of false orfraudulent statements made by the tax-payer with respect to any issue relating toits federal tax liability.

.06 Change treated as initiated by thetaxpayer.For purposes of § 481, a changein method of accounting made under thisrevenue procedure is a change in methodof accounting initiated by the taxpayer.

SECTION 6. GENERAL APPLICATIONPROCEDURES

.01 Consent. Pursuant to §1.446–1(e)(2)(i), the consent of the Com-missioner is hereby granted to any tax-payer within the scope of this revenueprocedure to change a method of account-ing, provided the taxpayer complies withall the applicable provisions of this rev-enue procedure.

.02 Filing requirements.(1) Waiver of taxable year filing re-

quirement. The requirement under §1.446–1(e)(3)(i) to file a Form 3115within the taxable year for which thechange is requested is waived for any ap-plication for a change in method of ac-counting filed pursuant to this revenueprocedure. See§ 1.446–1(e)(3)(ii).

(2) Timely duplicate filing requirement. (a) In general. A taxpayer chang-

ing a method of accounting pursuant tothis revenue procedure must complete andfile an application in duplicate. The origi-nal must be attached to the taxpayer’stimely filed (including extensions) origi-nal federal income tax return for the yearof change, and a copy (with signature) ofthe application must be filed with the na-tional office (see section 6.02(6) of thisrevenue procedure for the address) no ear-

lier than the first day of the year of changeand no later than when the original is filedwith the federal income tax return for theyear of change.

(b) Limited relief for late appli-cation.

(i) Automatic extension. An au-tomatic extension of 6 months from thedue date of the return for the year ofchange (excluding extensions) is grantedto file an application, provided the tax-payer (A) timely filed (including exten-sions) its federal income tax return for theyear of change, (B) files an amended re-turn within the 6-month extension periodin a manner that is consistent with thenew method of accounting, (C) attachesthe original application to the amendedreturn, (D) files a copy of the applicationwith the national office no later than whenthe original is filed with the amended re-turn, and (E) writes at the top of the appli-cation “FILED PURSUANT TO §301.9100–2.”

(ii) Other extensions.A tax-payer that fails to file the application forthe year of change as provided in section6.02(2)(a) or 6.02(2)(b)(i) of this revenueprocedure will not be granted an exten-sion of time to file under § 301.9100 ofthe Procedure and Administration Regula-tions, except in unusual and compellingcircumstances. See§ 301.9100–3(c)(2).

(3) Label. (a) In order to assist in processing

an application under this revenue proce-dure, the section of the APPENDIX ofthis revenue procedure describing the spe-cific change in method of accountingshould be included in the application. Forexample, a phrase such as “Section 1.01of the APPENDIX of Rev. Proc. 99–49”should be included on the appropriate lineon the Form 3115.

(b) If a taxpayer is authorizedunder the APPENDIX of this revenueprocedure to file a statement in lieu of aForm 3115, the taxpayer must include thetaxpayer’s name and employer identifica-tion number (or social security number inthe case of an individual) at the top of thefirst page of the statement underneath anyother required label.

(4) Signature requirements.The ap-plication must be signed by, or on behalfof, the taxpayer requesting the change byan individual with authority to bind thetaxpayer in such matters. For example, an

December 27, 1999 734 1999–52 I.R.B.

officer must sign on behalf of a corpora-tion, a general partner on behalf of a statelaw partnership, a member-manager onbehalf of a limited liability company, atrustee on behalf of a trust, or an individ-ual taxpayer on behalf of a sole proprietor-ship. If the taxpayer is a member of a con-solidated group, an application submittedon behalf of the taxpayer must be signedby a duly authorized officer of the com-mon parent. See the signature require-ments set forth in the General Instructionsattached to a current Form 3115 regardingthose who are to sign. If an agent is autho-rized to represent the taxpayer before theService, receive the original or a copy ofthe correspondence concerning the appli-cation, or perform any other act(s) regard-ing the application filed on behalf of thetaxpayer, a power of attorney reflectingsuch authorization(s) must be attached tothe application. A taxpayer’s representa-tive without a power of attorney to repre-sent the taxpayer as indicated in this sec-tion will not be given any informationregarding the application.

(5) Where to file copy.(a) For a taxpayer other than an

exempt organization, the copy of the ap-plication must be addressed to the Com-missioner of Internal Revenue, Attention:CC:DOM:IT&A (Automatic RulingsBranch), P.O. Box 7604, BenjaminFranklin Station, Washington, D.C. 20044(or, in the case of a designated private de-livery service: Commissioner of InternalRevenue, Attention: CC:DOM:IT&A(Automatic Rulings Branch), 1111 Con-stitution Avenue, NW, Washington, D.C.20224).

(b) For an exempt organization,the copy of the application must be ad-dressed to the Commissioner, Tax Exemptand Government Entities, Attention:TEGE:EO, P.O. Box 120, BenjaminFranklin Station, Washington, D.C. 20044(or, in the case of a designated private de-livery service: Commissioner, Tax Ex-empt and Government Entities, Attention:TEGE:EO, 1111 Constitution Avenue,NW, Washington, D.C. 20224).

(c) The copy of the applicationmay also be hand delivered:

(i) To the drop box at the 12th

Street entrance of 1111 Constitution Av-enue, NW, Washington, D.C. No receiptwill be given at the drop box. For a tax-payer other than an exempt organization,

the copy of the application must be ad-dressed to the Commissioner of InternalRevenue, Attention: CC:DOM:IT&A(Automatic Rulings Branch), 1111 Con-stitution Avenue, NW, Washington, D.C.20224. For an exempt organization, thecopy of the application must be addressedto the Commissioner, Tax Exempt andGovernment Entities, Attention:TEGE:EO, 1111 Constitution Avenue,NW, Washington, D.C. 20224; or

(ii) Between the hours of 8:15a.m. and 5:00 p.m., to the courier’s deskat the main entrance of 1111 ConstitutionAvenue, NW, Washington, D.C. A receiptwill be given at the courier’s desk. For ataxpayer other than an exempt organiza-tion, the copy of the application must beaddressed to the Commissioner of Inter-nal Revenue, Attention: CC:DOM:IT&A(Automatic Rulings Branch), 1111 Con-stitution Avenue, NW, Washington, D.C.20224. For an exempt organization, thecopy of the application must be addressedto the Commissioner, Tax Exempt andGovernment Entities, Attention:TEGE:EO, 1111 Constitution Avenue,NW, Washington, D.C. 20224

(6) No user fee.A user fee is not re-quired for an application filed under thisrevenue procedure, and, except as pro-vided in section 6.02(6)(c)(ii) of this rev-enue procedure, the receipt of an applica-tion filed under this revenue procedurewill not be acknowledged.

(7) Single application for certainconsolidated groups.A parent corpora-tion may file a single application tochange an identical method of accountingon behalf of more than one member of aconsolidated group. To qualify, the tax-payers in the consolidated group must bemembers of the same affiliated groupunder § 1504(a) that join in the filing of aconsolidated tax return, and they must bechanging from the identical presentmethod of accounting to the identical pro-posed method of accounting. All aspectsof the change in method of accounting,including the present and proposed meth-ods, the underlying facts, and the author-ity for the change, must be identical, ex-cept for the § 481(a) adjustment. Seesection 15.07(3) of Rev. Proc. 99– 1,1999–1 I.R.B. 6, 53 (or any successor),for the information required to be submit-ted with the application.

.03 Taxpayer under examination.(1) In general. Except as otherwise

provided in the APPENDIX of this rev-enue procedure (see, for example, sec-tions 4.01, 4A.01, 5.04, 8.05, 9.02,10A.01, 12.01, and 12.02 of the AP-PENDIX of this revenue procedure), ataxpayer that is under examination mayfile an application to change a method ofaccounting under section 6 of this rev-enue procedure only if the taxpayer iswithin the provisions of section 6.03(2)(90-day window), 6.03(3) (120-day win-dow), or 6.03(4) (district director con-sent) of this revenue procedure. A tax-payer that files an application beyondthe time periods provided in the 90-dayand 120-day windows is not eligible forthe automatic extension of time and willnot be granted an extension of time tofile under § 301.9100, except in unusualand compelling circumstances.

(2) 90-day window period.(a) A taxpayer may file a copy of

the application with the national office tochange a method of accounting under thisrevenue procedure during the first 90-days of any taxable year (the “90-daywindow”) if the taxpayer has been underexamination for at least 12 consecutivemonths as of the first day of the taxableyear. This 90-day window is not avail-able if the method of accounting the tax-payer is changing is an issue under con-sideration at the time the copy of theapplication is filed or an issue the examin-ing agent(s) has placed in suspense at thetime the copy of the application is filed.

(b) A taxpayer changing a methodof accounting under this 90-day windowmust provide a copy of the application tothe examining agent(s) at the same time itfiles the copy of the application with thenational office. The application mustcontain the name(s) and telephone num-ber(s) of the examining agent(s). The tax-payer must attach to the application a sep-arate statement signed by the taxpayercertifying that, to the best of the tax-payer’s knowledge, the same method ofaccounting is not an issue under consider-ation or an issue placed in suspense by theexamining agent(s).

(3) 120-day window period.(a) A taxpayer may file a copy of

the application with the national office tochange a method of accounting under thisrevenue procedure during the 120-day pe-

1999–52 I.R.B. 735 December 27, 1999

riod following the date an examinationends (the “120-day window”), regardlessof whether a subsequent examination hascommenced. This 120-day window is notavailable if the method of accounting thetaxpayer is changing is an issue underconsideration at the time a copy of the ap-plication is filed or an issue the examiningagent(s) has placed in suspense at the timethe copy of the application is filed.

(b) A taxpayer changing a methodof accounting under this 120-day windowmust provide a copy of the application tothe examining agent(s) for any examina-tion that is in process at the same time itfiles the copy of the application with thenational office. The application mustcontain the name(s) and telephone num-ber(s) of the examining agent(s). The tax-payer must attach to the application a sep-arate statement signed by the taxpayercertifying that, to the best of the tax-payer’s knowledge, the same method ofaccounting is not an issue under consider-ation or an issue placed in suspense by theexamining agent(s).

(4) Consent of district director. (a) A taxpayer under examination

may change its method of accountingunder this revenue procedure if the dis-trict director consents to the filing of theapplication. The district director will con-sent to the filing of the application unless,in the opinion of the district director, themethod of accounting to be changedwould ordinarily be included as an item ofadjustment in the year(s) for which thetaxpayer is under examination. For ex-ample, the district director will consent tothe filing of an application to change froma clearly permissible method of account-ing, or from an impermissible method ofaccounting where the impermissiblemethod was adopted subsequent to theyears under examination. The question ofwhether the method of accounting fromwhich the taxpayer is changing is permis-sible or was adopted subsequent to theyears under examination may be referredto the national office as a request for tech-nical advice under the provisions of Rev.Proc. 99–2 (or any successor).

(b) A taxpayer changing a methodof accounting under this revenue proce-dure with the consent of the district direc-tor must attach to the application a state-ment from the district director consentingto the filing of the application. The tax-

payer must provide a copy of the applica-tion to the district director at the sametime it files a copy of the application withthe national office. The application mustcontain the name(s) and telephone num-ber(s) of the examining agent(s).

.04 Taxpayer before an appeals office.Except as otherwise provided in the AP-PENDIX of this revenue procedure (see,for example, sections 4.01, 4A.01, 5.04,8.05, 9.02, 10A.01, 12.01, and 12.02 ofthe APPENDIX of this revenue proce-dure), a taxpayer that is before an appealsoffice must attach to the application a sep-arate statement signed by the taxpayercertifying that, to the best of the tax-payer’s knowledge, the same method ofaccounting is not an issue under consider-ation by the appeals office. The taxpayermust provide a copy of the application tothe appeals officer at the same time it filesa copy of the application with the nationaloffice. The application must contain thename and telephone number of the ap-peals officer.

.05 Taxpayer before a federal court.Except as otherwise provided in the AP-PENDIX of this revenue procedure (see,for example, sections 4.01, 4A.01, 5.04,8.05, 9.02, 10A.01, 12.01, and 12.02 ofthe APPENDIX of this revenue proce-dure), a taxpayer that is before a federalcourt must attach to the application a sepa-rate statement signed by the taxpayer cer-tifying that, to the best of the taxpayer’sknowledge, the same method of account-ing is not an issue under consideration bythe federal court. The taxpayer must pro-vide a copy of the application to the coun-sel for the government at the same time itfiles a copy of the application with the na-tional office. The application must con-tain the name and telephone number of thecounsel for the government.

.06 Compliance with provisions.If ataxpayer to which this revenue procedureapplies changes to a method of account-ing without complying with all the applic-able provisions of this revenue procedure(for example, the taxpayer changes to amethod of accounting that varies from theapplicable accounting method describedin this revenue procedure or the taxpayeris outside the scope of this revenue proce-dure), the taxpayer has initiated a changein method of accounting without obtain-ing the consent of the Commissioner asrequired by § 446(e). Upon examination,

a taxpayer that has initiated an unautho-rized change in method of accountingmay be denied the change. Alternatively,such a taxpayer may be required to effectthe change in an earlier or later taxableyear and may be denied the benefit ofspreading the § 481(a) adjustment overthe number of taxable years otherwiseprescribed by this revenue procedure.

SECTION 7. AUDIT PROTECTIONFOR TAXABLE YEARS PRIOR TOYEAR OF CHANGE

.01 In general. Except as provided insection 7.02 or the APPENDIX of thisrevenue procedure, when a taxpayertimely files a copy of the application withthe national office in compliance with allthe applicable provisions of this revenueprocedure, the Service will not require thetaxpayer to change its method of account-ing for the same item for a taxable yearprior to the year of change.

.02 Exceptions. (1) Change not made or made im-

properly. The Service may change a tax-payer’s method of accounting for priortaxable years if (a) the taxpayer fails toimplement the change, (b) the taxpayerimplements the change but does not com-ply with all the applicable provisions ofthis revenue procedure, or (c) the methodof accounting is changed or modified be-cause there has been a misstatement oromission of material facts (seesection8.02(2) of this revenue procedure).

(2) Change in sub-method.The Ser-vice may change a taxpayer’s method ofaccounting for prior taxable years if thetaxpayer is changing a sub-method of ac-counting within the method. For exam-ple, an examining agent may propose toterminate the taxpayer’s use of the LIFOinventory method during a prior taxableyear even though the taxpayer changes itsmethod of valuing increments in the cur-rent year.

(3) Prior year Service-initiatedchange. The Service may make adjust-ments to the taxpayer’s returns for thesame item for taxable years prior to therequested year of change to reflect a prioryear Service-initiated change.

(4) Criminal investigation. The Ser-vice may change a taxpayer’s method ofaccounting for the same item for taxableyears prior to the year of change if there is

December 27, 1999 736 1999–52 I.R.B.

any pending or future criminal investiga-tion or proceeding concerning (a) directlyor indirectly, any issue relating to the tax-payer’s federal tax liability for any tax-able year prior to the year of change, or(b) the possibility of false or fraudulentstatements made by the taxpayer with re-spect to any issue relating to its federaltax liability for any taxable year prior tothe year of change.

SECTION 8. EFFECT OF CONSENT

.01 In general. A taxpayer thatchanges to a method of accounting pur-suant to this revenue procedure may berequired to change or modify thatmethod of accounting for the followingreasons:

(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 state-ment published in the Internal RevenueBulletin;

(5) the issuance of written notice tothe taxpayer that the change in method ofaccounting was not in compliance with allthe applicable provisions of this revenueprocedure or is not in accord with the cur-rent views of the Service; or

(6) a change in the material facts onwhich the consent was based.

.02 Retroactive change or modifica-tion. Except in rare or unusual circum-stances, if a taxpayer that changes itsmethod of accounting under this revenueprocedure is subsequently required undersection 8.01 of this revenue procedure tochange or modify that method of account-ing, the required change or modificationwill not be applied retroactively, providedthat:

(1) the taxpayer complied with allthe applicable provisions of this revenueprocedure;

(2) there has been no misstatementor omission of material facts;

(3) there has been no change in thematerial facts on which the consent wasbased;

(4) there has been no change in theapplicable law; and

(5) the taxpayer to whom consentwas granted acted in good faith in relying

on the consent, and applying the changeor modification retroactively would be tothe taxpayer’s detriment.

SECTION 9. REVIEW BY DISTRICTDIRECTOR

.01 In general. The district directormust apply a change in method of ac-counting made in compliance with allthe applicable provisions of this revenueprocedure in determining the taxpayer’sliability, unless the district director rec-ommends that the change in method ofaccounting should be modified or re-voked. (See section 6.06 of this revenueprocedure if a change in method of ac-counting is made without complyingwith all the applicable provisions of thisrevenue procedure.) The district direc-tor wi l l ascertain i f the change inmethod of accounting was made in com-pliance with all the applicable provi-sions of this revenue procedure, includ-ing whether:

(1) the representations on which thechange was based reflect an accuratestatement of the material facts;

(2) the amount of the § 481(a) ad-justment was properly determined;

(3) the change in method of account-ing was implemented in compliance withall the applicable provisions of this rev-enue procedure.

The district director will also ascertainwhether:

(4) there has been any change in thematerial facts on which the change wasbased during the period the method of ac-counting was used; and

(5) there has been any change in theapplicable law during the period themethod of accounting was used.

.02 National office consideration.Ifthe district director recommends that achange in method of accounting (otherthan the § 481(a) adjustment) made incompliance with all the applicable provi-sions of this revenue procedure should bemodified or revoked, the district directorwill forward the matter to the national of-fice for consideration before any furtheraction is taken. Such a referral to the na-tional office will be treated as a requestfor technical advice, and the provisions ofRev. Proc. 99–2 (or any successor) will befollowed.

SECTION 10. REVIEW BY NA-TIONAL OFFICE

.01 In general. Any application filedunder this revenue procedure may be re-viewed by the national office. If the ap-plication is reviewed by the national of-fice, the procedures in sections 10.02through 10.04 of this revenue procedureapply.

.02 Incomplete application — 30 dayrule. If the Service reviews an applicationand determines that the application is notproperly completed in accordance with theinstructions of the Form 3115 or the provi-sions of this revenue procedure, or if sup-plemental information is needed, the Ser-vice will notify the taxpayer. Thenotification will specify the informationthat needs to be provided, and the taxpayerwill be permitted 30 days from the date ofthe notification to furnish the necessary in-formation. The Service reserves the rightto impose shorter reply periods if subse-quent requests for additional informationare made. An extension of the 30-day pe-riod to furnish information, not to exceed30 days, may be granted to a taxpayer. Arequest for an extension of the 30-day pe-riod must be made in writing and submit-ted within the initial 30-day period. If theextension request is denied, there is noright of appeal. Ordinarily, if the taxpayerfails to provide the additional informationon a timely basis, the application does notqualify for the automatic consent proce-dures of this revenue procedure.

.03 Conference in the national office.If the national office tentatively deter-mines that the taxpayer has changed itsmethod of accounting without comply-ing with all the applicable provisions ofthis revenue procedure (for example, thetaxpayer changed to a method of ac-counting that varies from the applicableaccounting method described in this rev-enue procedure or the taxpayer is outsidethe scope of this revenue procedure), thenational office will notify the taxpayer ofits tentative adverse determination andwill offer the taxpayer a conference ofright, if the taxpayer has requested a con-ference. For conference procedures fortaxpayers other than exempt organiza-tions, see section 11 of Rev. Proc. 99–1(or any successor). For conference pro-cedures for exempt organizations, seesection 12 of Rev. Proc. 99–4, 1999–1I.R.B. 115 (or any successor).

1999–52 I.R.B. 737 December 27, 1999

.04 National office determination.(1) Consent not granted.Except as

provided in section 10.04(2) of this rev-enue procedure, if the national office de-termines that a taxpayer has changed itsmethod of accounting without complyingwith all the applicable provisions of thisrevenue procedure, the national officewill notify the taxpayer that consent tomake the change in method of accountingis not granted. See section 6.06 of thisrevenue procedure.

(2) Application changed.If the na-tional office determines that a taxpayerhas changed its method of accountingwithout complying with all the applicableprovisions of this revenue procedure, thenational office, in its discretion, mayallow the taxpayer (a) to make appropri-ate adjustments to conform its change inmethod of accounting to the applicableprovisions of this revenue procedure, and(b) to make conforming amendments toany federal income tax returns filed forthe year of change and subsequent taxableyears. Any application changed undersection 10.04(2) of this revenue proce-dure is subject to review by the district di-rector as provided in section 9 of this rev-enue procedure.

SECTION 11. APPLICABILITY OFREV. PROCS. 99–1 AND 99–4

Rev. Procs. 99–1 and 99–4 (or any suc-cessors) are applicable to applicationsfiled under this revenue procedure, unlessspecifically excluded or overridden byother published guidance (including thespecial procedures in this document).

SECTION 12. INQUIRIES

Inquiries regarding this revenue proce-dure may be addressed to the Commis-sioner of Internal Revenue, Attention:CC:DOM:IT&A, 1111 Constitution Av-enue, NW, Washington, D.C. 20224.

SECTION 13. EFFECTIVE DATE

.01 In general. Except as provided insections 13.02 and 13.03 of this revenueprocedure, this revenue procedure is ef-fective for taxable years ending on orafter December 27, 1999. The Servicewill return any application that is filed onor after December 27, 1999 if the applica-tion is filed with the national office pur-suant to the Code, regulations, or admin-

istrative guidance other than this revenueprocedure and the change in method ofaccounting is within the scope of this rev-enue procedure.

.02 Transition rules. If a taxpayerfiled an application or ruling requestwith the national office to make a changein method of accounting authorized bythis revenue procedure, and the applica-tion or ruling request is pending with thenational office on December 27, 1999,the taxpayer may make the change underthis revenue procedure. However, thenational office will process the applica-tion or ruling request in accordance withthe authority under which it was filed,unless prior to the later of February 1,2000, or the issuance of the letter rulinggranting or denying consent to thechange, the taxpayer notifies the nationaloffice that it wants to make the changeunder this revenue procedure. If the tax-payer timely notifies the national officethat it wants to make the method changeunder this revenue procedure, the na-tional office will require the taxpayer tomake appropriate modifications to theapplication or ruling request to complywith the applicable provisions of thisrevenue procedure. In addition, any userfee that was submitted with the applica-tion or ruling request will be returned tothe taxpayer.

.03 Special rules.(1) Change in method of accounting

to comply with § 404(a)(11). For achange in method of accounting describedin section 4A.01 of the APPENDIX ofthis revenue procedure, this revenue pro-cedure is effective for the taxpayer’s firsttaxable year ending after July 22, 1998.

(2) Changes in methods of account-ing for § 467 rental agreements.Forchanges in methods of accounting de-scribed in sections 8A.01, 8A.02, and8A.03 of the APPENDIX of this revenueprocedure, this revenue procedure is ef-fective for applications filed after Decem-ber 27, 1999 for the taxpayer’s first tax-able year ending after May 18, 1999.

(3) Change in method of accountingto discontinue the mark-to-market methodof accounting.For a change in method ofaccounting described in section 10A.01 ofthe APPENDIX of this revenue proce-dure, this revenue procedure is effectivefor the taxpayer’s first taxable year end-ing after July 22, 1998.

(4) Change in method of accountingfor a pool of debt instruments.For achange in method of accounting describedin section 12.02 of the APPENDIX of thisrevenue procedure, this revenue proce-dure is effective for the taxpayer’s firsttaxable year beginning after August 5,1997.

SECTION 14. EFFECT ON OTHERDOCUMENTS

.01 Rev. Proc. 98–60, is clarified,modified, amplified, and superseded.

.02 Section 7 of Rev. Proc. 92–67,1992–2 C.B. 429, is modified and, asmodified, is superseded. The remainderof Rev. Proc. 92–67 remains in effect asoriginally published.

.03 Section 6 of Rev. Proc. 99–17,1999–7 I.R.B. 52, is superseded. The re-mainder of Rev. Proc. 99–17 remains ineffect as originally published.

SECTION 15. PAPERWORKREDUCTION ACT

The collections of information con-tained in this revenue procedure havebeen reviewed and approved by the Of-fice of Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545–1551.

An agency may not conduct or sponsor,and a person is not required to respond to,a collection of information unless the col-lection of information displays a validOMB control number.

The collections of information in thisrevenue procedure are in sections 6, 10,and sections 1A, 2, 3, 5, 6, 7, 10, 10A, 12,and 12A of the APPENDIX. This infor-mation is necessary and will be used todetermine whether the taxpayer properlychanged to a permitted method of ac-counting. The collections of informationare required for the taxpayer to obtainconsent to change its method of account-ing. The likely respondents are the fol-lowing: individuals, farms, business orother for-profit institutions, nonprofit in-stitutions, and small businesses or organi-zations.

The estimated total annual reportingand/or recordkeeping burden is 15,739hours.

The estimated annual burden per re-spondent/recordkeeper varies from 1/6

December 27, 1999 738 1999–52 I.R.B.

hour to 81/2 hours, depending on individ-ual circumstances, with an estimated av-erage of 11/2 hours. The estimated num-ber of respondents is 13,650. Theestimated annual frequency of responsesis on occasion.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Grant D. Anderson of the Of-fice of Assistant Chief Counsel (IncomeTax and Accounting). For further infor-mation regarding this revenue procedure,contact Mr. Anderson on (202) 622-4970(not a toll-free call). For further informa-tion regarding the APPENDIX of this rev-enue procedure contact the following in-dividuals: (1) for changes in methods ofaccounting under sections 1A.01 and12A.01 of the APPENDIX of this revenueprocedure, Christina Morrison of the Of-fice of Assistant Chief Counsel (FinancialInstitutions and Products) on (202) 622-3960 (not a toll-free call); (2) for changesin methods of accounting under sections2.01 and 2.02 of the APPENDIX of thisrevenue procedure, Peter Friedman of theOffice of Assistant Chief Counsel(Passthroughs and Special Industries) on(202) 622-3110 (not a toll-free call); (3)for changes in methods of accountingunder section 2A.01 of the APPENDIX ofthis revenue procedure, Leslie H. Finlowof the Office of Assistant Chief Counsel(Passthroughs and Special Industries) on(202) 622-3120 (not a toll free call);(4)forchanges in methods of accounting undersection 4A.01 of the APPENDIX of thisrevenue procedure, Norm Paul of the Of-fice of Associate Chief Counsel (Em-ployee Benefits and Exempt Organiza-tions); (5) for changes in methods ofaccounting under sections 5.04, 6, 12, and13 of the APPENDIX of this revenue pro-cedure, William Blanchard of the Officeof Assistant Chief Counsel (Financial In-stitutions and Products) on (202) 622-3950 (not a toll-free call); (6) for changesin methods of accounting under section5A.01 of the APPENDIX of this revenue

procedure, Timothy Sebastian of the Of-fice of Assistant Chief Counsel (FinancialInstitutions and Products) on (202) 622-3920 (not a toll-free call); (7) for changesin methods of accounting under section10A.01 of the APPENDIX of this revenueprocedure, Pamela Lew of the Office ofAssistant Chief Counsel (Financial Insti-tutions and Products) on (202) 622-3950(not a toll-free call); (8) for changes inmethods of accounting under section10A.02 of the APPENDIX of this revenueprocedure, JoLynn Ricks of the Office ofAssistant Chief Counsel (Financial Insti-tutions and Products) on (202) 622-3920(not a toll-free call); (9) for changes inmethods of accounting under section 11of the APPENDIX of this revenue proce-dure, Craig R. Wojay of the Office of As-sistant Chief Counsel (Financial Institu-tions and Products) on (202) 622-3920(not a toll-free call); and (10) for all othersections, Mr. Anderson on (202) 622-4970 (not a toll-free call).

APPENDIX

CHANGES IN METHODS OF

ACCOUNTING TO WHICH

THIS REVENUE PROCEDURE

APPLIES

SECTION 1. TRADE OR BUSINESSEXPENSES (§ 162)

.01 Advances made by a lawyer on be-half of clients — Description of changeand scope. This change applies to alawyer handling cases on a contingent feebasis that advances money to pay forcosts of litigation or for other expenses onbehalf of clients and that wants to changethe method of accounting for such ad-vances from treating them as deductiblebusiness expenses to treating them asloans. See Boccardo v. United States, 12Cl. Ct. 184 (1987); Canelo v. Commis-sioner, 53 T.C. 217 (1969), aff ’d per cu-riam, 447 F.2d 484 (9th Cir. 1971).

.02 Year 2000 costs — Description ofchange and scope.This change applies toa taxpayer that wants to change itsmethod of accounting for Year 2000 costs(as defined in Rev. Proc. 97–50, 1997–2C.B. 525) to conform to the method de-scribed in section 3 of Rev. Proc. 97–50.Section 3 of Rev. Proc. 97–50 providesthat Year 2000 costs fall within the

purview of Rev. Proc. 69–21, 1969–2C.B. 303, and that the Service will notdisturb a taxpayer’s treatment of its Year2000 costs as deductible expenses or capi-tal expenditures if the taxpayer treatsthese costs in accordance with Rev. Proc.69–21.

SECTION 1A. AMORTIZABLE BONDPREMIUM (§ 171)

.01 Revocation of § 171(c) election.(1) Description of change and scope.

This change applies to a taxpayer thatwants to change its method of accountingfor amortizable bond premium by revokingits § 171(c) election. Under § 171(c), ataxpayer that holds certain taxable bondsmay elect to amortize any bond premiumon the bonds in accordance with regula-tions prescribed by the Secretary. Sections1.171–1 through 1.171–5 provide rules re-lating to the amortization of bond premiumby a taxpayer. Section 1.171–4 providesthe procedures to make a § 171(c) electionto amortize bond premium.

(2) Revocation of election.The re-vocation of a § 171(c) election applies toall taxable bonds that are held by the tax-payer on the first day of the first taxableyear for which the revocation is effective(year of change), and to all taxable bondsthat are subsequently acquired by the tax-payer.

(3) Manner of making the change.This change is made using a cut-offmethod and applies only to taxable bondsheld during or after the year of change.Consequently, for taxable bonds held atthe beginning of the year of change, thetaxpayer may not amortize any remainingbond premium on the bonds. Becausecut-off treatment is prescribed for thischange, the basis of any bond, adjustedfor amounts previously amortized duringthe period of the election, is not affectedby the revocation.

(4) Additional requirements.On astatement attached to the application, thetaxpayer must provide:

(a) the reason(s) for revoking theelection; and

(b) a description of the method bywhich, and the date on which, the tax-payer made the § 171(c) election that isproposed to be revoked.

(5) Audit protection. A taxpayer re-ceives audit protection under section 7 of

1999–52 I.R.B. 739 December 27, 1999

this revenue procedure in connection withthis change. However, the audit protec-tion applicable to this change does notpreclude the Commissioner from examin-ing the method used by the taxpayer todetermine the amount of amortizablebond premium under § 171(b) for a tax-able year prior to the year of change.

.02 Reserved.

SECTION 2. DEPRECIATION ORAMORTIZATION (§ 56(a)(1),56(g)(4)(A), 167, 168, OR 197, ORFORMER § 168)

.01 Impermissible to permissiblemethod of accounting for depreciation oramortization.

(1) Description of change.(a) This change applies to a tax-

payer that wants to change from an imper-missible method of accounting for depre-ciation or amortization (depreciation)under which the taxpayer did not claimthe depreciation allowable, to a permissi-ble method of accounting for depreciationunder which the taxpayer will claim thedepreciation allowable.

(b) A change from a taxpayer’simpermissible method of accounting fordepreciation under which the taxpayer didnot claim the depreciation allowable to apermissible method of accounting for de-preciation under which the taxpayer willclaim the depreciation allowable is achange in method of accounting for whichthe consent of the Commissioner is re-quired. Sections 1.167(e)–1(a) and1.446–1(e)(2)(ii)(b). This methodchange, however, does not include anycorrection of mathematical or posting er-rors. Section 1.446–1(e)(2)(ii)(b).

(2) Scope.(a) Applicability. This change ap-

plies to any taxpayer that has used an im-permissible method of accounting for de-preciation in at least the two taxable yearsimmediately preceding the year ofchange, and is changing that accountingmethod to a permissible method of ac-counting for depreciation, for any item ofproperty:

(i) for which, under the tax-payer’s impermissible method of account-ing, the taxpayer has not taken into ac-count any depreciation allowance or hastaken into account some depreciation butless than or more than the depreciation al-

lowable (claimed less than or more thanthe depreciation allowable);

(ii) for which depreciation isdetermined under§ 56(a)(1), 56(g)(4)(A),167, 168, 197, or 168 prior to its amend-ment in 1986 (former § 168); and

(iii) that is owned by the tax-payer at the beginning of the year ofchange.

(b) Certain scope limitations inap-plicable. The scope limitations in section4.02(8) of this revenue procedure are notapplicable to this change.

(c) Inapplicability. This changedoes not apply to:

(i) any property to which §1016(a)(3) (regarding property held by atax-exempt organization) applies;

(ii) any taxpayer that is subjectto § 263A and that is required to capitalizethe costs with respect to which the tax-payer wants to change its method of ac-counting under section 2.01 of this AP-PENDIX, if the taxpayer is notcapitalizing the costs as required;

(iii) any intangible propertysubject to § 56(g)(4)(A) or 167, except forproperty subject to § 167(f) (regardingcertain property excluded from § 197);

(iv) any property subject to §167(g) (regarding property depreciatedunder the income forecast method);

(v) any § 1250 property that ataxpayer is reclassifying to an asset classof Rev. Proc. 87–56, 1987–2 C.B. 674, orRev. Proc. 83–35, 1983–1 C.B. 745, asappropriate, that does not explicitly in-clude § 1250 property (for example, assetclass 57.0, Distributive Trades and Ser-vices);

(vi) any property for which a tax-payer is revoking a timely valid election, ormaking a late election, under § 167, 168,former § 168, or § 13261(g)(2) or (3) of theRevenue Reconciliation Act of 1993 (1993Act), 1993–3 C.B. 1, 128 (relating to amor-tizable § 197 intangibles). A taxpayer mayrequest consent to revoke or make the elec-tion by submitting a request for a letter rul-ing under Rev. Proc. 99–1, 1999–1 I.R.B. 6(or any successor);

(vii) any property subject to §56(g)(4)(A) or 167 (other than § 167(f),regarding certain property excluded from§ 197), for which a taxpayer is changingonly the estimated useful life of the prop-erty. A change in the estimated useful lifeof property for which depreciation is de-

termined under § 56(g)(4)(A) or 167(other than § 167(f)) must be madeprospectively (see, for example, §1.167(b)–2(c)). (In contrast, section 2.01of this APPENDIX generally applies to achange in the recovery period of propertyfor which depreciation is determinedunder § 56(a)(1), 56(g)(4)(A), 168 or for-mer § 168);

(viii) any depreciable propertythat changes use but continues to beowned by the same taxpayer (see, for ex-ample, § 168(i)(5));

(ix) any property for which de-preciation is determined in accordancewith § 1.167(a)–11 (regarding the ClassLife Asset Depreciation Range System(ADR));

(x) any change in method of ac-counting involving a change from deduct-ing the cost or other basis of any propertyas an expense to capitalizing and depreci-ating the cost or other basis;

(xi) any change in method ofaccounting involving a change from onepermissible method of accounting for theproperty to another permissible method ofaccounting for the property. For example:

(A) a change from thestraight-line method of depreciation tothe income forecast method of deprecia-tion for videocassettes. SeeRev. Rul.89–62, 1989–1 C.B. 78; or

(B) a change from chargingthe depreciation reserve with costs ofremoval and crediting the depreciationreserve with salvage proceeds to deduct-ing costs of removal as an expense (pro-vided the costs of removal are notrequired to be capitalized under any pro-vision of the Code, such as, § 263(a))and including salvage proceeds in tax-able income (see section 2.02 of thisAPPENDIX for making this change forproperty for which depreciation is deter-mined under § 167);

(xii) any change in method ofaccounting involving both a change fromtreating the cost or other basis of the prop-erty as nondepreciable property to treat-ing the cost or other basis of the propertyas depreciable property and the adoptionof a method of accounting for deprecia-tion requiring an election under § 167,168, former § 168, or § 13261(g)(2) or (3)of the 1993 Act (for example, a change inthe treatment of the space consumed inlandfills placed in service in 1990 from

December 27, 1999 740 1999–52 I.R.B.

nondepreciable to depreciable property(assuming section 2.01(2)(c)(xiii) of theAPPENDIX does not apply) and the mak-ing of an election under § 168(f)(1) to de-preciate this property under the unit-of-production method of depreciation under§ 167);

(xiii) any change in method ofaccounting for an item of income or de-duction other than depreciation, even if ataxpayer’s present method of accountingmay have resulted in the taxpayer claim-ing less than or more than the deprecia-tion allowable. For example, a change inmethod of accounting involving:

(A) a change in inventorycosts (for example, when property isreclassified from inventory property todepreciable property, or vice versa) (butsee section 3.02 of this APPENDIX formaking a change from inventory proper-ty to depreciable property for unrecover-able line pack gas or unrecoverable cush-ion gas); or

(B) a change in the characterof a transaction from sale to lease, orvice versa (but see section 2.03 of thisAPPENDIX for making this change); or

(xiv) a change from deter-mining depreciation under § 168 todetermining depreciation under former §168 for any property subject to the tran-sition rules in § 203(b) or 204(a) of theTax Reform Act of 1986, 1986–3 (Vol. 1)C.B. 1, 60–80.

(3) Additional requirements.A tax-payer also must comply with the following:

(a) Permissible depreciationmethod.A taxpayer must change to a per-missible method of accounting for depre-ciation for the item of property. Thismethod is the same method that deter-mines the depreciation allowable for theitem of property (as provided in section2.01(6) of this APPENDIX).

(b) Statements required.A tax-payer must provide the following state-ments, if applicable, and attach them tothe completed application:

(i) a detailed description of theformer and new methods of accounting.A general description of these methods ofaccounting is unacceptable (for example,MACRS to MACRS or erroneous methodto proper method);

(ii) to the extent not providedelsewhere on the application, a statementdescribing the taxpayer’s business or in-

come-producing activities. Also, if thetaxpayer has more than one business orincome-producing activity, a statementdescribing the taxpayer’s business or in-come-producing activity in which theitem of property at issue is primarily usedby the taxpayer;

(iii) to the extent not providedelsewhere on the application, a statementof the facts and law supporting the newmethod of accounting, new classificationof the item of property, and new assetclass in, as appropriate, Rev. Proc. 87–56or Rev. Proc. 83–35. If the taxpayer is theowner and lessor of the item of propertyat issue, the statement of the facts and lawsupporting the new asset class also mustdescribe the business or income-produc-ing activity in which that item of propertyis primarily used by the lessee;

(iv) to the extent not providedelsewhere on the application, a statementidentifying the year in which the item ofproperty was placed in service;

(v) if the item of property is de-preciated under former § 168, a statementidentifying the asset class in Rev. Proc.83–35 that applies under the taxpayer’sformer and new methods of accounting (ifnone, state and explain);

(vi) if any item of property ispublic utility property within the meaningof § 168(i)(10) or former § 167(l)(3)(A),as applicable, a statement providing thatthe taxpayer agrees to the following addi-tional terms and conditions:

(A) a normalization methodof accounting (within the meaning offormer § 167(l)(3)(G), former § 168(e)(3)(B), or § 168(i)(9), asapplicable) will be used for the publicutility property subject to the applica-tion;

(B) as of the beginning of theyear of change, the taxpayer will adjust itsdeferred tax reserve account or similarreserve account in the taxpayer’s regula-tory books of account by the amount ofthe deferral of federal income tax liabilityassociated with the § 481(a) adjustmentapplicable to the public utility propertysubject to the application; and

(C) within 30 calendar daysof filing the federal income tax return forthe year of change, the taxpayer will pro-vide a copy of the completed applicationto any regulatory body having jurisdictionover the public utility property subject to

the application; (vii) if the taxpayer is changing

the classification of an item of § 1250property placed in service after August19, 1996, to a retail motor fuels outletunder § 168(e)(3)(E)(iii), a statement con-taining the following representation: “Forpurposes of § 168(e)(3)(E)(iii) of the In-ternal Revenue Code, the taxpayer repre-sents that (A) 50 percent or more of thegross revenue generated from the item of§ 1250 property is from the sale of petro-leum products (not including gross rev-enue from related services, such as thelabor cost of oil changes and gross rev-enue from the sale of nonpetroleum prod-ucts such as tires and oil filters), (B) 50percent or more of the floor space in theitem of property is devoted to the sale ofpetroleum products (not including floorspace devoted to related services, such asoil changes and floor space devoted tononpetroleum products such as tires andoil filters), or (C) the item of § 1250 prop-erty is 1,400 square feet or less.”; and

(viii) if the taxpayer is changingthe classification of an item of propertyfrom § 1250 property to § 1245 propertyunder § 168 or former § 168, a statementof the facts and law supporting the new §1245 property classification, and a state-ment containing the following representa-tion: “Each item of property that is thesubject of the application filed under sec-tion 2.01 of the APPENDIX of Rev. Proc.99–49 for the year of change beginning[Insert the date], and that is reclassifiedfrom [Insert, as appropriate: nonresiden-tial real property, residential rental prop-erty, 19-year real property, 18-year realproperty, or 15-year real property]to anasset class of [Insert, as appropriate, ei-ther: Rev. Proc. 87–56, 1987–2 C.B. 674,or Rev. Proc. 83–35, 1983–1 C.B. 745]that does not explicitly include § 1250property, is § 1245 property for deprecia-tion purposes.”

(4) Section 481(a) adjustment.Be-cause the adjusted basis of the property ischanged as a result of a method changemade under section 2.01 of this APPEN-DIX (seesection 2.01(5) of this APPEN-DIX), items are duplicated or omitted.Accordingly, this change is made with a §481(a) adjustment. This adjustment mayresult in either a negative § 481(a) adjust-ment (a decrease in taxable income) or apositive § 481(a) adjustment (an increase

1999–52 I.R.B. 741 December 27, 1999

in taxable income) and may be a differentamount for regular tax, alternative mini-mum tax, and adjusted current earningspurposes. This § 481(a) adjustment equalsthe difference between the total amount ofdepreciation taken into account in com-puting taxable income for the propertyunder the taxpayer’s former method of ac-counting, and the total amount of depreci-ation allowable for the property under thetaxpayer’s new method of accounting (asdetermined under section 2.01(6) of thisAPPENDIX), for open and closed yearsprior to the year of change. However, theamount of the § 481(a) adjustment mustbe adjusted to account for the properamount of the depreciation allowable thatis required to be capitalized under any pro-vision of the Code (for example, § 263A)at the beginning of the year of change.

(5) Basis adjustment.As of the be-ginning of the year of change, the basis ofdepreciable property to which section2.01 of this APPENDIX applies must re-flect the reductions required by §1016(a)(2) for the depreciation allowablefor the property (as determined under sec-tion 2.01(6) of this APPENDIX).

(6) Meaning of depreciation allowable.(a) In general. Section 2.01(6) of

this APPENDIX provides the amount ofthe depreciation allowable, determinedunder § 56(a)(1), 56(g)(4)(A), 167, 168,197, or former § 168. This amount, how-ever, may be limited by other provisionsof the Code (for example, § 280F).

(b) Section 56(a)(1) property. Thedepreciation allowable for any taxableyear for property for which depreciationis determined under § 56(a)(1) is deter-mined by using the depreciation method,recovery period, and convention providedfor under § 56(a)(1) that applies for theproperty’s placed-in-service date.

(c) Section 56(g)(4)(A) property.The depreciation allowable for any tax-able year for property for which deprecia-tion is determined under § 56(g)(4)(A) isdetermined by using the depreciationmethod, recovery period or useful life, asapplicable, and convention provided forunder § 56(g)(4)(A) that applies for theproperty’s placed-in-service date.

(d) Section 167 property.Gener-ally, for any taxable year, the depreciationallowable for property for which depreci-ation is determined under § 167, is deter-mined either:

(i) under the depreciationmethod adopted by a taxpayer for theproperty; or

(ii) if that depreciation methoddoes not result in a reasonable allowancefor depreciation or a taxpayer has notadopted a depreciation method for theproperty, under the straight-line deprecia-tion method.

For determining the estimated usefullife and salvage value of the property, see§§ 1.167(a)–1(b) and (c), respectively.The depreciation allowable for any tax-able year for property subject to § 167(f)(regarding certain property excluded from§ 197) is determined by using the depreci-ation method and useful life prescribed in§ 167(f).

(e) Section 168 property. The de-preciation allowable for any taxable yearfor property for which depreciation is de-termined under § 168, is determined byusing either:

(i) the general depreciation sys-tem in § 168(a); or

(ii) the alternative depreciationsystem in § 168(g) if the property is re-quired to be depreciated under the alterna-tive depreciation system pursuant to §168(g)(1) or other provisions of the Code(for example, property described in §263A(e)(2)(A) or 280F(b)(1)). Propertyrequired to be depreciated under the alter-native depreciation system pursuant to §168(g)(1) includes property in a class (asset out in § 168(e)) for which the taxpayermade a timely election under § 168(g)(7).

(f) Section 197 property. The de-preciation allowable for any taxable yearfor an amortizable § 197 intangible (in-cluding any property for which a timelyelection under § 13261(g)(2) of the 1993Act was made) is determined by using thestraight-line method over a 15-year pe-riod.

(g) Former § 168 property. Thedepreciation allowable for any taxableyear for property subject to former § 168is determined by using either:

(i) the accelerated method ofcost recovery applicable to the property(for example, for 5-year property, the re-covery method under former § 168(b)(1));or

(ii) the straight-line method ap-plicable to the property if the property isrequired to be depreciated under thestraight-line method (for example, prop-

erty described in former § 168(f)(12) orformer § 280F(b)(2)) or if the taxpayerelected to determine the depreciation al-lowance under the optional straight-linepercentage (for example, the straight-linemethod in former § 168(b)(3)).

.02 Permissible to permissible methodof accounting for depreciation.

(1) Description of change. Thischange applies to a taxpayer that wants tochange from a permissible method of ac-counting for depreciation under §56(g)(4)(A)(iv) or 167 to another permis-sible method of accounting for deprecia-tion under § 56(g)(4)(A)(iv) or 167. Pur-suant to §§ 1.167(a)–7(a) and (c), ataxpayer may account for depreciableproperty either by treating each individualasset as an account or by combining twoor more assets in a single account and, foreach account, depreciation allowances arecomputed separately.

(2) Scope. (a) Applicability. This change ap-

plies to any taxpayer wanting to make achange in method of accounting for de-preciation specified in section 2.02(3) ofthis APPENDIX for the property in an ac-count:

(i) for which the present andproposed methods of accounting for de-preciation specified in section 2.02(3) ofthis APPENDIX are permissible methodsfor the property under § 56(g)(4)(A) or167; and

(ii) that is owned by the tax-payer at the beginning of the year ofchange.

(b) Certain scope limitations inap-plicable. The scope limitations in section4.02(8) of this revenue procedure are notapplicable to this change.

(c) Inapplicability. This changedoes not apply to:

(i) any taxpayer that is subjectto § 263A and that is required to capitalizethe costs with respect to which the tax-payer wants to change its method of ac-counting under section 2.02 of this AP-PENDIX, if the taxpayer is notcapitalizing the costs as required;

(ii) any property to which §1016(a)(3) (regarding property held by atax-exempt organization) applies;

(iii) any intangible property;(iv) any property described in §

167(f) (regarding certain property ex-cluded from § 197);

December 27, 1999 742 1999–52 I.R.B.

(v) any property subject to §167(g) (regarding property depreciatedunder the income forecast method);

(vi) any property for which de-preciation is determined under § 56(a)(1),56(g)(4)(A)(i), (ii), (iii), or (v), 168 or §168 prior to its amendment in 1986 (for-mer § 168);

(vii) any property that the tax-payer elected under § 168(f)(1) or former§ 168(e)(2) to exclude from the applica-tion of, respectively, § 168 or former §168;

(viii) any property for whichdepreciation is determined in accordancewith § 1.167(a)–11 (regarding the ClassLife Asset Depreciation Range System(ADR)); or

(ix) any depreciable property forwhich the taxpayer is changing the depreci-ation method pursuant to § 1.167(e)–1(b)(change from declining-balance method tostraight-line method), § 1.167(e)–1(c) (cer-tain changes for § 1245 property), or §1.167(e)–1(d) (certain changes for § 1250property). These changes must be madeprospectively and are not permitted underthe cited regulations for property for whichthe depreciation is determined under § 168or former § 168.

(3) Changes covered.Section 2.02of this APPENDIX only applies to the fol-lowing changes in methods of accountingfor depreciation:

(a) a change from the straight-linemethod to thesum-of-the-years-digits method, the sink-ing fund method, the unit-of-productionmethod, or the declining-balance methodusing any proper percentage of thestraight-line rate;

(b) a change from the declining-balance method using any percentage ofthe straight-line rate to the sum-of-the-years-digits method, the sinking fundmethod, or the declining-balance methodusing a different proper percentage of thestraight-line rate;

(c) a change from the sum-of-the-years-digits method to the sinking fundmethod, the declining-balance methodusing any proper percentage of thestraight-line rate, or the straight-linemethod;

(d) a change from the unit-of-pro-duction method to the straight-linemethod;

(e) a change from the sinking fund

method to the straight-line method, theunit-of-production method, the sum-of-the-years-digits method, or the declining-balance method using any proper percent-age of the straight-line rate;

(f) a change in the interest factorused in connection with a compound in-terest method or sinking fund method;

(g) a change in averaging conven-tion as set forth in § 1.167(a)–10(b).However, as specifically provided in §1.167(a)–10(b), in any taxable year inwhich an averaging convention substan-tially distorts the depreciation allowancefor the taxable year, it may not be used(seeRev. Rul. 73–202, 1973–1 C.B. 81);

(h) a change from charging the de-preciation reserve with costs of removaland crediting the depreciation reservewith salvage proceeds to deducting costsof removal as an expense and includingsalvage proceeds in taxable income as setforth in § 1.167(a)–8(e)(2). SeeRev. Rul.74–455, 1974–2 C.B. 63. This change,however, may be made under this revenueprocedure only if:

(i) the change is applied to allitems in the account for which the changeis being made; and

(ii) the removal costs are not re-quired to be capitalized under any provi-sion of the Code (for example, § 263(a),263A, or 280B);

(i) a change from crediting the de-preciation reserve with the salvage pro-ceeds realized on normal retirement salesto computing and recognizing gains andlosses on such sales (see Rev. Rul.70–165, 1970–1 C.B. 43);

(j) a change from crediting ordi-nary income (including the combinationmethod of crediting the lesser of esti-mated salvage value or actual salvageproceeds to the depreciation reserve, withany excess of salvage proceeds over esti-mated salvage value credited to ordinaryincome) with the salvage proceeds real-ized on normal retirement sales, to com-puting and recognizing gains and losseson such sales (seeRev. Rul. 70–166,1970–1 C.B. 44); or

(k) a change from item accountingfor specific assets to multiple asset ac-counting for the same assets, or viceversa.

(4) Additional requirements.A tax-payer also must comply with the follow-ing:

(a) Basis for depreciation. At thebeginning of the year of change, the basisfor depreciation of property to which thischange applies is the adjusted basis of theproperty as provided in § 1011 at the endof the taxable year immediately precedingthe year of change (determined under thetaxpayer’s present method of accountingfor depreciation). If applicable under thetaxpayer’s proposed method of account-ing for depreciation, this adjusted basis isreduced by the estimated salvage value ofthe property (for example, a change to thestraight-line method).

(b) Rate of depreciation.The rateof depreciation for property changed to:

(i) the straight-line or sum-of-the-years-digits method of depreciationmust be based on the remaining useful lifeof the property as of the beginning of theyear of change; or

(ii) the declining-balancemethod of depreciation must be based onthe useful life of the property measuredfrom the placed-in-service date, and notthe expected remaining life from the datethe change becomes effective.

(c) Regulatory requirements.Forchanges in method of depreciation to thesum-of-the-years-digits or declining-bal-ance method, the property must meet therequirements of § 1.167(b)–0 or1.167(c)–1, as appropriate.

(d) Public utility property. If anyitem of property is public utility propertywithin the meaning of former §167(l)(3)(A), the taxpayer must attach tothe application a statement providing thatthe taxpayer agrees to the following addi-tional terms and conditions:

(i) a normalization method ofaccounting within the meaning of former§ 167(l)(3)(G) will be used for the publicutility property subject to the application;and

(ii) within 30 calendar days offiling the federal income tax return for theyear of change, the taxpayer will providea copy of the completed application toany regulatory body having jurisdictionover the public utility property subject tothe application.

(5) Section 481(a) adjustment.Be-cause the adjusted basis of the property isnot changed as a result of a methodchange made under section 2.02 of thisAPPENDIX, no items are being dupli-cated or omitted. Accordingly, the §

1999–52 I.R.B. 743 December 27, 1999

481(a) adjustment is zero. .03 Sale or lease transactions.

(1) Description of change and scope.(a) Applicability. This change ap-

plies to a taxpayer that wants to change itsmethod of accounting from:

(i) improperly treating prop-erty as sold by the taxpayer to properlytreating property as leased by the tax-payer;

(ii) improperly treating propertyas leased by the taxpayer to properlytreating property as sold by the taxpayer;

(iii) improperly treating prop-erty as purchased by the taxpayer to prop-erly treating property as leased by the tax-payer; and

(iv) improperly treating prop-erty as leased by the taxpayer to properlytreating property as purchased by the tax-payer.

(b) Inapplicability. This changedoes not apply to:

(i) a rent-to-own dealer thatwants to change its method of accountingfor rent-to-own contracts described insection 3 of Rev. Proc. 95–38, 1995–2C.B. 397; or

(ii) a taxpayer that holds assetsfor sale or lease, if any asset so held is notthe subject of a sale or lease transaction asof the beginning of the year of change.

(2) Manner of making the change.(a) The change in method of ac-

counting under section 2.03 of this AP-PENDIX is made using a cut-off methodand applies to transactions entered into onor after the beginning of the year ofchange. Seesection 2.06 of this revenueprocedure.

(b) If a taxpayer wants to changeits method of accounting for existingsale or lease transactions, the taxpayermust file an application with the Com-missioner in accordance with the re-quirements of § 1.446–1(e)(3)(i) andRev. Proc. 97–27. A change involvingexisting sale or lease transactions willrequire a § 481(a) adjustment. Consentto change a method of accounting for anexisting sale or lease transaction isgranted only in unusual and compellingcircumstances.

(3) No audit protection.A taxpayerdoes not receive audit protection undersection 7 of this revenue procedure inconnection with this change.

SECTION 2A. RESEARCH ANDEXPERIMENTAL EXPENDITURES (§174)

.01 Changes to a different method ordifferent amortization period.

(1) Description of change.(a) This change applies to a tax-

payer that wants to change the treatment ofexpenditures that qualify as research andexperimental expenditures under § 174.

(b) Section 174 and the regulationsthereunder provide the specific rules forchanging a method of accounting under §174 for research and experimental expen-ditures. Under § 174, a taxpayer may treatresearch and experimental expendituresthat are paid or incurred by the taxpayerduring the taxable year in connection withthe taxpayer’s trade or business as ex-penses under § 174(a) or as deferred ex-penses amortizable ratably over a periodof not less than 60 months under § 174(b).Pursuant to § 1.174–1, research and exper-imental expenditures that are not treated asexpenses or deferred expenses under §174 must be treated as capital expendi-tures. Further, § 1.174–1 provides that theexpenditures to which § 174 applies mayrelate either to a general research programor to a particular project.

(c) If a taxpayer has not treated re-search and experimental expenditures asexpenses under § 174(a), §§ 174(a)(2)(B)and 1.174–3(b)(2) provide that the tax-payer may, with consent, adopt the ex-pense method at any time.

(d) If a taxpayer has treated re-search and experimental expenditures asexpenses under § 174(a), §§ 174(a)(3)and 1.174–3(b)(3) provide that the tax-payer may, with consent, change to a dif-ferent method of treating research and ex-perimental expenditures.

(e) If a taxpayer has treated re-search and experimental expenditures asdeferred expenses under § 174(b), §§174(b)(2) and 1.174–4(b)(2) provide thatthe taxpayer may, with consent, change toa different method of treating research orexperimental expenditures or to a differ-ent period of amortization for deferred ex-penses.

(2) Scope.(a) Applicability. This change ap-

plies to any taxpayer that is changing:(i) from treating research and

experimental expenditures for a particular

project or projects as expenses under §174(a) to treating such expenditures asdeferred expenses under § 174(b), or viceversa;

(ii) to a different period ofamortization for research and experimen-tal expenditures for a particular project orprojects that are being treated as deferredexpenses under § 174(b); or

(ii i) from treating researchand experimental expenditures for aparticular project or projects as ex-penses under § 174(a) or deferred ex-penses under § 174(b) to treating suchexpenditures as a capital expenditureunder § 263(a), or vice versa.

(b) Scope limitations clarified.The scope limitation under section4.02(6) of this revenue procedure is ap-plied on a project by project basis.

(c) Inapplicability. This changedoes not apply to:

(i) a portion of the research andexperimental expenditures paid or in-curred for a particular project during theyear of change or in subsequent taxableyears (that is, the change must apply to allof such expenditures; see§§ 1.174–3(a)and 1.174–4(a)(5));

(ii) a change in the treatment ofcomputer software costs under Rev. Proc.69–21, 1969–2 C.B. 303; or

(iii) a change in the treatment ofYear 2000 costs under Rev. Proc. 97–50,1997–2 C.B. 525 (but see section 1.02 ofthis APPENDIX for making this change).

(3) Manner of making the change.(a) This change is made using a

cut-off method and applies to all researchand experimental expenditures paid or in-curred for a particular project or projectsduring the year of change and in subse-quent taxable years. Seesection 2.06 ofthis revenue procedure and §§ 174(b)(2),1.174–3(a), 1.174–3(b)(2), and1.174–4(a)(5).

(b) The requirement under §§ 1.174–3(b)(2), 1.174–3(b)(3), and1.174–4(b)(2) to file an application nolater than the end of the first taxableyear in which the different method ordifferent amortization period is to beused is waived for this change. How-ever, see section 6 of this revenue proce-dure for filing requirements applicableunder this revenue procedure.

(c) The consent granted under thisrevenue procedure satisfies the consent

December 27, 1999 744 1999–52 I.R.B.

required under §§ 174(a)(2)(B),174(a)(3), 174(b)(2), 1.174–3(b)(2),1.174–3(b)(3), and 1.174–4(b)(2).

(4) Additional requirement.A tax-payer must attach to the application awritten statement providing:

(a) the information required in §1.174–3(b)(2) if the taxpayer is changingto treating research and experimental ex-penditures as expenses under § 174(a);

(b) the information required in §1.174–3(b)(3) if the taxpayer is changingfrom treating research and experimentalexpenditures as expenses under § 174(a);or

(c) the information required in §1.174–4(b)(2) if the taxpayer is changingfrom treating research and experimentalexpenditures as deferred expenses methodunder § 174(b) or is changing to a differ-ent period of amortization for researchand experimental expenditures beingtreated as deferred expenses under §174(b).

(5) No audit protection. A taxpayerdoes not receive audit protection undersection 7 of this revenue procedure inconnection with this change.

.02 Reserved.

SECTION 3. CAPITALEXPENDITURES (§ 263)

.01 Package design costs.(1) Description of change and scope.

(a) Applicability. This change ap-plies to a taxpayer that wants to change itsmethod of accounting for package designcosts that are within the scope of Rev.Proc. 97–35, 1997–2 C.B. 448, to one ofthe three alternative methods of account-ing for package design costs described insection 5 of Rev. Proc. 97–35. The threealternative methods of accounting forpackage design costs described are: (1)the capitalization method, (2) the design-by-design capitalization and 60-monthamortization method, and (3) the pool-of-cost capitalization and 48-month amorti-zation method.

(b) Inapplicability. This changedoes not apply to a taxpayer that wants tochange to the capitalization method forcosts of developing (or modifying) anypackage design that has an ascertainableuseful life.

(2) Additional requirements.If ataxpayer is changing its method of ac-

counting for package design costs to thecapitalization method or the design-by-design capitalization and 60-month amor-tization method, the taxpayer must attacha statement to its timely filed application.The statement must provide a descriptionof each package design, the date on whicheach was placed in service, and the costbasis of each (as determined under sec-tions 5.01(2) or 5.02(2) of Rev. Proc.97–35).

.02 Line pack gas; cushion gas. (1) Description of change and scope.

This change applies to a taxpayer thatwants to change its method of accountingfor line pack gas or cushion gas to amethod consistent with the holding inRev. Rul. 97–54, 1997–2 C.B. 23. Rev.Rul. 97–54 holds that the cost of line packgas or cushion gas is a capital expenditureunder § 263, the cost of recoverable linepack gas or recoverable cushion gas is notdepreciable, and the cost of unrecoverableline pack gas or unrecoverable cushiongas is depreciable under §§ 167 and 168.

(2) Additional requirements.A tax-payer that changes its method of account-ing for unrecoverable line pack gas or un-recoverable cushion gas under section3.02 of this APPENDIX must change to apermissible method of accounting for de-preciation for the cost of that gas.

SECTION 4. UNIFORMCAPITALIZATION (§ 263A)

.01 Certain uniform capitalization(UNICAP) methods used by small re-sellers, formerly small resellers, and re-seller-producers.

(1) Description of change and scope. (a) Applicability. This change

applies to: (i) a small reseller of personal

property changing from a permissibleUNICAP method to a permissible non-UNICAP inventory capitalization methodin any taxable year that it qualifies as asmall reseller;

(ii) a formerly small resellerchanging from a permissible non-UNI-CAP inventory capitalization method to apermissible UNICAP method in the firsttaxable year that it does not qualify as asmall reseller;

(iii) a reseller-producer chang-ing from a permissible UNICAP methodfor both its production and resale activi-

ties to a permissible simplified resalemethod described in § 1.263A–3(d)(3) inany taxable year that it qualifies to use asimplified resale method for both its pro-duction and resale activities under §1.263A–3(a)(4) (resellers with de min-imis production activities); or

(iv) a reseller-producer chang-ing from a permissible simplified resalemethod described in § 1.263A–3(d)(3) forboth its production and resale activities toa permissible UNICAP method for bothits production and resale activities in thefirst taxable year that it does not qualify touse a simplified resale method for both itsproduction and resale activities under §1.263A–3(a)(4).

(b) Scope limitations inapplicable.A taxpayer that wants to make this changeis not subject to the scope limitations insection 4.02 of this revenue procedure.However, if the taxpayer is under exami-nation, before an appeals office, or beforea federal court, the taxpayer must providea copy of the application to the examiningagent(s), appeals officer, or counsel forthe government, as appropriate, at thesame time that it files the copy of the ap-plication with the national office. The ap-plication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

(c) Inapplicability. This changedoes not apply to a taxpayer making a his-toric absorption ratio election under §1.263A–2(b)(4) or 1.263A–3(d)(4).

(2) Definitions.(a) “Reseller” means a taxpayer

that acquires real or personal property de-scribed in § 1221(1) for resale.

(b) “Small reseller” means a re-seller whose average annual gross re-ceipts for the three immediately precedingtaxable years (or fewer, if the taxpayerhas not been in existence during the threepreceding taxable years) do not exceed$10,000,000. See§ 263A(b)(2)(B).

(c) “Formerly small reseller”means a reseller that no longer qualifiesas a small reseller.

(d) “Producer” means a taxpayerthat produces real or tangible personalproperty.

(e) “Reseller-producer” means ataxpayer that is both a producer and a re-seller.

( f) “Permissible UNICAP

1999–52 I.R.B. 745 December 27, 1999

method” means a method of capitalizingcosts that is permissible under § 263A.

(g) “Permissible non-UNICAP in-ventory capitalization method” means amethod of capitalizing inventory coststhat is permissible under § 471.

(3) Section 481(a) adjustment.Be-ginning with the year of change, a tax-payer changing its method of accountingfor costs pursuant to section 4.01 of thisAPPENDIX generally must take any ap-plicable § 481(a) adjustment into accountratably over the same number of taxableyears, not to exceed four, that the tax-payer used its former method of account-ing. See section 5.04(3) of this revenueprocedure for exceptions to this generalrule.

(4) No audit protection. A taxpayerdoes not receive audit protection undersection 7 of this revenue procedure inconnection with this change.

(5) Example. The following exam-ple illustrates the principles of section4.01 of this APPENDIX for small re-sellers and formerly small resellers.

Assume X, a corporate reseller ofpersonal property, incorporated January 2,1991, adopted a taxable year ending De-cember 31. X determines that its averageannual gross receipts for the three taxableyears (or fewer, if applicable) immedi-ately preceding taxable years 1991through 2000 are as shown in the tablebelow:

AVERAGE Annual GrossCurrent Receipts for the Three

Taxable YearsTaxable Years Immediately Pre-

ceding the

Current Taxable Year Year1991 $ 01992 5,000,0001993 6,000,0001994 7,000,0001995 11,000,0001996 11,000,0001997 9,000,0001998 8,000,0001999 11,000,0002000 12,000,000

Furthermore, X, which adopted the dol-lar-value LIFO inventory method, has thefollowing LIFO inventory balances deter-mined without considering the effects ofthe UNICAP method:

Beginning Ending1995 $1,000,000 $1,100,0001996 1,100,000 1,200,0001997 1,200,000 1,300,0001998 1,300,000 1,400,0001999 1,400,000 1,500,0002000 1,500,000 1,600,000

X was required by § 263A to change tothe UNICAP method for 1995 because itsaverage annual gross receipts for the threetaxable years immediately preceding1995 were $11,000,000, which exceededthe $10,000,000 ceiling permitted by thesmall reseller exception. Assume that Xwas required to capitalize $80,000 of “ad-ditional § 263A costs” to the cost of its1995 beginning inventory because of thischange in inventory method. In addition,X was required to include one-fourth ofthe § 481(a) adjustment when computingtaxable income for each of the four tax-able years beginning with 1995. Thus, Xwas required to include a $20,000 posi-tive § 481(a) adjustment in its 1995 tax-able income.

X elected to use the simplified resalemethod without a historic absorption ratioelection under § 1.263A–3(d)(3) for de-termining the amount of additional §263A costs to be capitalized to each LIFOlayer. Assume that X was required to add$10,000 of additional § 263A costs to thecost of its 1995 ending inventory becauseof the $100,000 increment for 1995.

X’s 1995 Ending Inventory:

Beginning Inventory (Without UNICAPcosts) . . . . . . . . . . . . . . . . . .$1,000,0001995 Increment . . . . . . . . . . . .100,000Additional § 263A Costs in BeginningInventory . . . . . . . . . . . . . . . . . .80,000Additional § 263A Costs in 1995Increment . . . . . . . . . . . . . . . . . .10,000Total 1995 Ending Inventory . . . . . . . . . . . . . . .$1,190,000

X’s Unamortized 1995 § 481(a) adjust-ment:

1995 § 481(a) Adjustment . . . .$80,000Amount Included in 1995 Taxable Income . . . . . . . . . . .<20,000>Unamortized 1995 § 481(a)Adjustment—12/31/95 . . . . . . .$60,000

Because X failed to satisfy the small re-seller exception for 1996, X was requiredto continue using the UNICAP methodfor its inventory costs. Furthermore, X

was required to include $20,000 of theunamortized 1995 positive § 481(a) ad-justment in 1996 taxable income. As-sume that X was required to add $10,000of additional § 263A costs to the cost ofits 1996 ending inventory because of the$100,000 increment for 1996.

X’s 1996 Ending Inventory:

Beginning Inventory (With UNICAPcosts) . . . . . . . . . . . . . . . . . .$1,190,0001996 Increment . . . . . . . . . . . .100,000

Additional § 263A Costs in 1996Increment . . . . . . . . . . . . . . . . 10,000Total 1996 Ending Inventory . . . . . . . . . . . . . . .$1,300,000

X’s Unamortized 1995 § 481(a)Adjustment:

Unamortized 1995 § 481(a)Adjustment—12/31/95 . . . . . $60,000

Amount Included in 1996 TaxableIncome . . . . . . . . . . . . . . . . . .<20,000>

Unamortized 1995 § 481(a)Adjustment—12/31/96 . . . . . . .$40,000

Because X satisfies the small resellerexception for 1997, X may change volun-tarily from the UNICAP method to a per-missible non-UNICAP inventory capital-ization method under section 4.01 of thisAPPENDIX. To reflect the removal ofthe additional § 263A costs from the costof its 1997 beginning inventory, X mustcompute a corresponding § 481(a) adjust-ment, which is a negative $100,000($1,200,000 - $1,300,000). Because Xused the UNICAP method for only twoyears (that is, 1995 and 1996), X must in-clude one-half of the § 481(a) adjustmentwhen computing taxable income for eachof the two taxable years beginning with1997. Thus, X must include a $50,000negative § 481(a) adjustment in 1997 tax-able income. In addition, X must include$20,000 of the unamortized 1995 § 481(a)adjustment in 1997 taxable income.

X’s 1997 Ending Inventory:

Beginning Inventory (With UNICAPcosts) . . . . . . . . . . . . . . . . . .$1,300,0001997 Increment . . . . . . . . . . . .100,0001997 § 481(a) Adjustment <Negative> . . . . . . . . . . . . .<100,000>Total 1997 Ending Inventory . . . . . . . . . . . . . . .$1,300,000

December 27, 1999 746 1999–52 I.R.B.

X’s Unamortized 1995 § 481(a)Adjustment:

Unamortized 1995 § 481(a)Adjustment—12/31/96 . . . . . $40,000Amount Included in 1997 TaxableIncome . . . . . . . . . . . . . . . . . .<20,000>Unamortized 1995 § 481(a)Adjustment—12/31/97 . . . . . . .$20,000

X’s Unamortized 1997 § 481(a)Adjustment:

1997 § 481(a) Adjustment<Negative> . . . . . . . . . . . .$<100,000>Amount Included in 1997 TaxableIncome . . . . . . . . . . . . . . . . . . . .50,000Unamortized 1997 § 481(a)Adjustment—12/31/97 . . . .$< 50,000>

X also satisfies the small reseller ex-ception for 1998 and, therefore, is not re-quired to return to the UNICAP methodfor 1998. X, however, must include$20,000 of the unamortized 1995 positive§ 481(a) adjustment and $50,000 of theunamortized 1997 negative § 481(a) ad-justment in 1998 taxable income.

X’s 1998 Ending Inventory:

Beginning Inventory (Without UNICAPcosts) . . . . . . . . . . . . . . . . . .$1,300,0001998 Increment . . . . . . . . . . . .100,000Total 1998 Ending Inventory . . . . . . . . . . . . . . .$1,400,000

X’s Unamortized 1995 § 481(a)Adjustment:

Unamortized 1995 § 481(a)Adjustment—12/31/97 . . . . . $20,000Amount Included in 1998 TaxableIncome . . . . . . . . . . . . . . . . . .<20,000>Unamortized 1995 § 481(a)Adjustment—12/31/98 . . . . . . . . .$ 0

X’s Unamortized 1997 § 481(a)Adjustment:

Unamortized 1997 § 481(a)Adjustment—12/31/97 . . . . $<50,000>Amount Included in 1998 TaxableIncome . . . . . . . . . . . . . . . . . . . .50,000Unamortized 1997 § 481(a)Adjustment—12/31/98 . . . . . . . .$ 0

In 1999, X fails to satisfy the small re-seller exception and, therefore, must re-turn to the UNICAP method as providedunder section 4.01 of this APPENDIX. Xchanges to the simplified resale methodwithout a historic absorption ratio elec-tion under § 1.263A–3(d)(3). Assume

that X must capitalize $120,000 of addi-tional § 263A costs to the cost of its 1999beginning inventory because of thischange in inventory method. In addi-tion, X must determine the appropriateadjustment period for the correspondingpositive § 481(a) adjustment. Because Xused its former inventory method for twotaxable years before 1999 (that is, 1997and 1998), X must include one-half ofthe § 481(a) adjustment when computingtaxable income for each of the two tax-able years beginning with 1999. Thus, Xmust include a $60,000 positive § 481(a)adjustment in its 1999 taxable income.Assume that X must add $10,000 of ad-ditional § 263A costs to the cost of its1999 ending inventory because of the$100,000 increment for 1999.

X’s 1999 Ending Inventory:

Beginning Inventory (Without UNICAPcosts) . . . . . . . . . . . . . . . . . .$1,400,0001999 Increment . . . . . . . . . . . .100,000Additional § 263A costs in Beginning Inventory . . . . . . . 120,000Additional § 263A costs in 1999Increment . . . . . . . . . . . . . . . . . .10,000Total 1999 Ending Inventory . . . . . . . . . . . . . . .$1,630,000

X’s Unamortized 1999 § 481(a) adjust-ment:

1999 § 481(a) Adjustment . . $120,000Amount Included in 1999 TaxableIncome . . . . . . . . . . . . . . . . .< 60,000>Unamortized 1999 § 481(a)Adjustment—12/31/99 . . . . . .$ 60,000

Because X fails to satisfy the smallreseller exception for 2000, X must con-tinue using the UNICAP method for itsinventory costs. Furthermore, X is re-quired to include $60,000 of the un-amortized 1999 positive § 481(a) adjust-ment in 2000 taxable income. Assumethat X is required to add $10,000 of ad-ditional § 263A costs to the cost of its2000 ending inventory because of the$100,000 increment for 2000.

X’s 2000 Ending Inventory:

Beginning Inventory (With UNICAPcosts) . . . . . . . . . . . . . . . . . .$1,630,0002000 Incremen . . . . . . . . . . . . .100,000Additional § 263A Costs in 2000Increment . . . . . . . . . . . . . . . . . .10,000Total 2000 Ending Inventory . . . . . . . . . . . . . . .$1,740,000

X’s Unamortized 1999 § 481(a)Adjustment:

Unamortized 1999 § 481(a)Adjustment—12/31/99 . . . . . $60,000Amount Included in 2000 TaxableIncome . . . . . . . . . . . . . . . . . .<60,000>Unamortized 1999 § 481(a)Adjustment—12/31/00 . . . . . . . . .$ 0

.02 Reserved.

SECTION 4A. DEFERREDCOMPENSATION (§ 404)

.01 Change to comply with §404(a)(11).

(1) Description of change and scope.(a) Applicability. This change

applies to a taxpayer that must changeits method of accounting for its firsttaxable year ending after July 22, 1998,to comply with § 404(a)(11). Section404(a)(11) provides that, for purposesof determining under § 404 whethercompensation of an employee is de-ferred compensation and when deferredcompensation is paid, no amount istreated as received by the employee, orpaid, until it is actually received by theemployee. Section 404(a)(11) over-turns the decision in Schmidt BakingCo. v. Commissioner, 107 T.C. 271(1996), in which the court held that a § 83(a) income inclusion event uponsecuritization of vacation and sever-ance pay benefits with a letter of creditconstitutes receipt of those benefits byemployees for purposes of determiningwhether an employer’s deduction forthe benefits is subject to § 404. SeeNotice 99–16, 1999–13 I .R.B. 10(March 29, 1999).

(b) Scope limitations inapplica-ble. A taxpayer that must make thischange is not subject to the scope limi-tations in section 4.02 of this revenueprocedure. However, if the taxpayer isunder examination, before an appealsoffice, or before a federal court, thetaxpayer must provide a copy of the ap-plication to the examining agent(s), ap-peals officer, or counsel for the govern-ment, as appropriate, at the same timethat it files the copy of the applicationwith the national office. The applica-tion must contain the name(s) and tele-phone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

1999–52 I.R.B. 747 December 27, 1999

(2) Section 481(a) adjustment pe-riod. A taxpayer must take the § 481(a)adjustment into account ratably overthree taxable years.

(3) No audit protection.A taxpayerdoes not receive audit protection undersection 7 of this revenue procedure inconnection with this change.

.02 Reserved.

SECTION 5. METHODS OFACCOUNTING (§ 446)

.01 Cash or hybrid method to accrualmethod.

(1) Description of change and scope.(a) Applicability. This change ap-

plies to:(i) a taxpayer that wants to

change to an overall accrual method, orto an overall accrual method in conjunc-tion with the recurring item exceptionunder § 461(h)(3), from the cash receiptsand disbursements method (cashmethod), or from a hybrid method (theuse of a combination of accountingmethods under which an item or items ofincome or expense are reported on thecash method and another item or otheritems of income or expense are reportedon an accrual method); or

(ii) a taxpayer that is required tochange to an overall accrual methodunder § 448, but is ineligible to make thechange under § 1.448–1(h)(2) (relating tothe “first § 448 year”).

(b) Inapplicability. This changedoes not apply to:

(i) a financial institution de-scribed in § 581 or 591;

(ii) a farmer; (iii) a cooperative organization

described in § 501(c)(12), 521, or 1381; (iv) an individual taxpayer, ex-

cept for activities conducted as a sole pro-prietorship;

(v) a taxpayer required to use aninventory method of accounting, unless:

(A) the taxpayer is using oradopts a proper inventory method under §471 and the regulations thereunder, thetaxpayer is a small reseller within themeaning of § 1.263A–3(a), and, if the tax-payer has production activities, the tax-payer’s production activities qualifyunder the de minimis presumption of §1.263A–3(a)(2)(iii); or

(B) the taxpayer is using or

adopts a proper inventory method under §471 and the regulations thereunder, thetaxpayer is a reseller eligible to use thesimplified resale method under §1.263A–3(d), and the taxpayer adopts aproper method under that section for theyear of change;

(vi) a taxpayer required to use along-term contract method in accordancewith § 460, if the taxpayer is not in com-pliance with that section and any relatedadministrative guidance;

(vii) a taxpayer required orwanting to use a special method of ac-counting, unless the taxpayer is permittedto change automatically to the specialmethod under this revenue procedure. Aspecial method of accounting is a methodthat deviates from the normal tax account-ing rules, such as the method of account-ing for advance payments pursuant to ei-ther Rev. Proc. 71–21, 1971–2 C.B. 549,or § 1.451–5, the installment method ofaccounting under § 453, or a long-termcontract method, such as the percentageof completion method or the completedcontract method;

(viii) a taxpayer required tochange to an overall accrual methodunder § 448 and eligible to make thechange under § 1.448–1(h)(2). See§1.448–1(h)(2), which provides an auto-matic consent procedure for a taxpayerchanging for the first taxable year that it issubject to § 448. See also §1.448–1(h)(1), which provides that §1.448–1(h) does not apply to a change re-quired under any Code section (or regula-tions thereunder) other than § 448 (for ex-ample, a taxpayer with inventories); or

(ix) a taxpayer engaged in twoor more trades or businesses, unless thetaxpayer uses or adopts the same overallaccrual method for each such trade orbusiness.

(2) Section 481(a) adjustment.(a) In general. The § 481(a) ad-

justment takes into account the accountsreceivable, accounts payable, inventory,and any other item determined to be nec-essary in order to prevent items frombeing duplicated or omitted. The § 481(a)adjustment does not include any item ofincome accrued but not received that wasworthless or partially worthless (withinthe meaning of § 166(a)) on the last dayof the year preceding the year of change.

(b) Recurring item exception.

As part of the change to an overall accrualmethod, a taxpayer may adopt the recur-ring item exception for the year of changeif the taxpayer is eligible and follows theprocedures of § 1.461–5(d). If the tax-payer is eligible and wants to adopt thismethod as specified in § 461(h)(3), theamount of the § 481(a) adjustment mustbe modified to account for the amount ofany additional deduction.

(3) Change to a special method ofaccounting. If a taxpayer that wants tochange to an accrual method in conjunc-tion with a change to a special method ofaccounting is not permitted to make thechange under this revenue procedure, thetaxpayer may request to make bothchanges only by filing one applicationunder the provisions of Rev. Proc. 97–27,1997–1 C.B. 680. Only one user fee willbe required for these changes.

.02 Multi-year service warrantycontracts.

(1) Description of change and scope. (a) Applicability. This change ap-

plies to an eligible accrual method manu-facturer, wholesaler, or retailer of motorvehicles or other durable consumer goodsthat wants to change to the service war-ranty income method described in section5 of Rev. Proc. 97–38, 1997–2 C.B. 479.Under the service warranty incomemethod, a qualifying taxpayer may, incertain specified and limited circum-stances, include a portion of an advancepayment related to the sale of a multi-yearservice warranty contract in gross incomegenerally over the life of the service war-ranty obligation.

(b) Inapplicability. This changedoes not apply to a taxpayer outside thescope of Rev. Proc. 97–38.

(2) Manner of making the change. (a) This change is made using a

cut-off method, under which the taxpayerbegins the use of the service warranty in-come method for all qualified advancepayment amounts received in the year ofchange and thereafter. Seesection 2.06 ofthis revenue procedure.

(b) In accordance with §1.446–1(e)(3)(ii), the requirement of §1.446–1(e)(3)(i) to file an application onForm 3115 is waived and a statement inlieu of the Form 3115 is authorized forthis change. The statement must be iden-tified at the top as follows: “CHANGETO THE SERVICE WARRANTY IN-

December 27, 1999 748 1999–52 I.R.B.

COME METHOD UNDER SECTION5.02 OF THE APPENDIX OF REV.PROC. 99–49.” The statement must setforth the information required under sec-tion 6.03 of Rev. Proc. 97–38, except thatthe statement under section 6.03(2) (thatthe taxpayer agrees to all of the terms andconditions of the revenue procedure) alsoshould refer to Rev. Proc. 99–49.

(c) A taxpayer changing to the ser-vice warranty income method of account-ing under section 5.02 of this APPENDIXmust satisfy the annual reporting require-ment set forth in section 6.04 of Rev.Proc. 97–38.

.03 Multi-year insurance policies formulti-year service warranty contracts —Description of change and scope.

(1) Applicability. This change appliesto a manufacturer, wholesaler, or retailer ofmotor vehicles or other durable consumergoods that wants to change its method ofaccounting for insurance costs paid or in-curred to insure its risks under multi-yearservice warranty contracts to the methoddescribed in section 5.03(3) of this APPEN-DIX. Multi-year service warranty contractsto which this change applies include onlythose separately priced contracts sold by amanufacturer, wholesaler, or retailer alsoselling the motor vehicles or other durableconsumer goods (to the ultimate customeror to an intermediary) underlying the con-tracts. The classification of goods as“durable consumer goods” for purposes ofthis change depends on the common usageof the goods, rather than the purchaser’s ac-tual intended use of the goods.

(2) Inapplicability. This change doesnot apply to a taxpayer that covers itsrisks under its multi-year service warrantycontracts through arrangements not con-stituting insurance.

(3) Description of method. If a tax-payer purchases a multi-year service war-ranty insurance policy (in connection withits sale of multi-year service warrantycontracts to customers) by paying a lump-sum premium in advance, the taxpayermust capitalize the amount paid or in-curred and may only obtain deductionsfor that amount by prorating (or amortiz-ing) it over the life of the insurance policy(whether the cash method or an accrualmethod of accounting is used to accountfor service warranty transactions).

.04 Interest accruals on short-termconsumer loans — Rule of 78s method.

(1) Description of change and scope. (a) Applicability. This change ap-

plies to a taxpayer that wants to change itsmethod of accounting from the Rule of78s method to the constant yield methodfor stated interest (including stated inter-est that is original issue discount) onshort-term consumer loans described inRev. Proc. 83–40, 1983–1 C.B. 774,which was obsoleted by Rev. Proc.97–37, 1997–2 C.B. 455.

(b) Scope limitations inapplica-ble. A taxpayer that wants to make thischange for its first or second taxableyear beginning on or after January 1,1998, is not subject to the scope limita-tions in section 4.02 of this revenue pro-cedure. However, if the taxpayer isunder examination, before an appealsoffice, or before a federal court, the tax-payer must provide a copy of the appli-cation to the examining agent(s), ap-peals off icer, or counsel for thegovernment, as appropriate, at the sametime that it files the copy of the applica-tion with the national office. The appli-cation must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

(2) Background.(a) A short-term consumer loan is

described in Rev. Proc. 83–40, provided:(i) the loan is a self-amortizing

loan that requires level payments, at regu-lar intervals at least annually, over a pe-riod not in excess of five years (with noballoon payment at the end of the loanterm); and

(ii) the loan agreement betweenthe borrower and the lender provides thatinterest is earned, or upon the prepaymentof the loan interest is treated as earned, inaccordance with the Rule of 78s method.

(b) In general, the Rule of 78smethod allocates interest over the term ofa loan based, in part, on the sum of the pe-riods’ digits for the term of the loan. SeeRev. Rul. 83–84, 1983–1 C.B. 97, for adescription of the Rule of 78s method.

(c) In general, the constant yieldmethod allocates interest and originalissue discount over the term of a loanbased on a constant yield. See §1.1272–1(c) for a description of the con-stant yield method. The Rule of 78smethod generally front-loads interest ascompared to the constant yield method.

(d) Rev. Proc. 83–40 was obso-leted because, under §§ 1.446–2 and1.1272–1 (which were effective for debtinstruments issued on or after April 4,1994), taxpayers generally must accountfor stated interest and original issue dis-count on a debt instrument (loan) by usinga constant yield method. As a result, theRule of 78s method is no longer an ac-ceptable method of accounting for federalincome tax purposes.

(e) Notwithstanding §§ 1.446–2and 1.1272–1, as a matter of administra-tive convenience, the Service will allow ataxpayer to use the Rule of 78s methodfor stated interest on short-term consumerloans described in Rev. Proc. 83–40 if theloans were issued prior to the first day ofthe taxpayer’s first taxable year that be-gins on or after January 1, 1999.

(3) Manner of making the change.(a) This change is made using a

cut-off method and applies only to loansissued on or after the first day of the yearof change. See section 2.06 of this rev-enue procedure.

(b) The taxpayer must maintainbooks and records sufficient to satisfy thedistrict director that loans issued beforethe year of change and loans issued on orafter the first day of the year of changehave been adequately accounted for sepa-rately.

SECTION 5A. TAXABLE YEAR OFINCLUSION (§ 451)

.01 Accrual of interest on nonperform-ing loans.

(1) Description of change and scope.(a) This change applies to an ac-

crual method taxpayer that is a bank asdefined in § 581 (or whose primary busi-ness is making or managing loans) andwants to change its method of accountingto comply with §§ 451 and 1.451–1(a) forqualified stated interest (as defined in §1.1273–1(c)) on nonperforming loans.

(b) Section 1.451–1(a) requires in-come to be accrued when all the eventshave occurred that fix the right to receivethe income and the amount thereof can bedetermined with reasonable accuracy. Ataxpayer may not stop accruing qualifiedstated interest on a nonperforming loanfor federal income tax purposes merelybecause payments on the loan are overdueby a certain length of time, such as 90

1999–52 I.R.B. 749 December 27, 1999

days, even if a federal, state, or other reg-ulatory authority having jurisdiction overthe taxpayer permits or requires that theoverdue interest not be accrued for regu-latory purposes.

(c) Under §§ 451 and 1.451–1(a),a taxpayer must continue accruing quali-fied stated interest on any nonperformingloan until either (i) the loan is worthlessunder § 166 and charged off as a bad debt,or (ii) the interest is determined to be un-collectible. In order for interest to be de-termined uncollectible, the taxpayer mustsubstantiate, taking into account all thefacts and circumstances, that it has no rea-sonable expectation of payment of the in-terest. This substantiation requirement isapplied on a loan by loan basis.

(d) A taxpayer that changes itsmethod of accounting under section5A.01 of this APPENDIX must do so forall of its loans.

(2) Section 481(a) adjustment.Ingeneral, the § 481(a) adjustment for amethod change under section 5A.01 ofthis APPENDIX represents the amount ofqualified stated interest, on the taxpayer’snonperforming loans outstanding as of thebeginning of the year of change, thatshould have been accrued under §§ 451and 1.451–1(a) and was not accrued. In-terest for which the taxpayer, as of the be-ginning of the year of change, has no rea-sonable expectation of payment is nottaken into account in determining theamount of the § 481(a) adjustment.

.02 Reserved.

SECTION 6. OBLIGATIONS ISSUEDAT DISCOUNT (§ 454)

.01 Series E or EE U.S. savings bonds.(1) Description of change and scope.

This change applies to a cash method tax-payer that wants to change its method ofaccounting for interest income on SeriesE or EE U.S. savings bonds. However,this change only applies to a taxpayer thathas previously made an election under §454 to report as interest income the in-crease in redemption price on a bond oc-curring in a taxable year, and that nowwants to report this income in the taxableyear in which the bond is redeemed, dis-posed of, or finally matures, whichever isearliest.

(2) Manner of making the change.(a) This change is made using a

cut-off method and is effective for any in-crease in redemption price occurring afterthe beginning of the year of change for allSeries E and EE U.S. savings bonds heldby the taxpayer on or after the beginningof the year of change. Seesection 2.06 ofthis revenue procedure.

(b) In accordance with §1.446–1(e)(3)(ii), the requirement of §1.446–1(e)(3)(i) to file an application onForm 3115 is waived and a statement inlieu of the Form 3115 is authorized forthis change. The statement must be iden-tified at the top as follows: “CHANGEIN METHOD OF ACCOUNTINGUNDER SECTION 6.01 OF THE AP-PENDIX OF REV. PROC. 99–49.” Thestatement must set forth:

(i) the Series E or EE U.S. sav-ings bonds for which this change in ac-counting method is requested;

(ii) an agreement to report allinterest on any bonds acquired during orafter the year of change when the inter-est is realized upon disposition, redemp-tion, or final maturity, whichever is ear-liest; and

(iii) an agreement to report allinterest on the bonds acquired before theyear of change when the interest is real-ized upon disposition, redemption, orfinal maturity, whichever is earliest, withthe exception of any interest income pre-viously reported in prior taxable years.

.02 Reserved.

SECTION 7. PREPAIDSUBSCRIPTION INCOME (§ 455)

.01 Prepaid subscription income.(1) Description of change and scope.

This change applies to an accrual methodtaxpayer that wants to change its methodof accounting for prepaid subscription in-come to the method described in § 455and the regulations thereunder, includingan eligible taxpayer that wants to makethe “within 12 months” election under §1.455–2.

(2) Manner of making the change. (a) This change is made using a

cut-off method and does not apply to anyprepaid subscription income received be-fore the first taxable year to which thechange applies. Any prepaid subscriptionincome arising prior to the year of changeis accounted for under the taxpayer’s for-mer method of accounting. Seesection

2.06 of this revenue procedure. (b) In accordance with §

1.446–1(e)(3)(ii), the requirement of §1.446–1(e)(3)(i) to file an application onForm 3115 is waived and a statement inlieu of the Form 3115 is authorized forthis change. The statement must be iden-tified at the top as follows: “CHANGEIN METHOD OF ACCOUNTINGFOR PREPAID SUBSCRIPTION IN-COME UNDER SECTION 7.01 OFTHE APPENDIX OF REV. PROC.99–49.” The statement must set forth theinformation required under § 1.455–6(b).

(c) The consent granted underthis revenue procedure satisfies the con-sent required under §§ 455(c)(3) and1.455–6(b).

.02 Reserved.

SECTION 8. TAXABLE YEAR OFDEDUCTION (§ 461)

.01 Timing of incurring liabilities foremployee compensation.

(1) Description of change and scope. (a) Applicability. This change ap-

plies to an accrual method taxpayer thatwants to change its method of accountingto treat bonuses or self-insured medicalbenefits as follows:

(i) Bonuses. If the obligation topay a bonus becomes fixed and certain bythe end of the taxable year (seeRev. Rul.61–127, 1961–2 C.B. 36), and the bonusis otherwise deductible, but the bonus ispaid after the 15th day of the third calen-dar month after the end of that taxableyear, to treat the bonus as deductible inthe taxable year of the employer in whichor with which ends the taxable year of theemployee in which the bonus is includiblein the gross income of the employee; or

(ii) Self-insured medical bene-fits. If the obligation to pay an em-ployee’s medical expenses is neither in-sured nor paid from a welfare benefit fundwithin the meaning of § 419(e), to treatthe liability as incurred in the taxable yearin which the employee files the claimwith the employer. See United States v.General Dynamics Corp., 481 U.S. 239(1987), 1987–2 C.B. 134.

(b) Inapplicability. This changedoes not apply to a taxpayer that is subjectto § 263A and that is required to capitalizethe costs with respect to which the tax-payer wants to change its method of ac-

December 27, 1999 750 1999–52 I.R.B.

counting under section 8.01 of this AP-PENDIX, if the taxpayer is not capitaliz-ing the costs as required.

(2) Amounts taken into account. Ap-plicable provisions of the Code, regulations,and other published guidance prescribe themanner in which a liability that has been in-curred is taken into account. For example,for a taxpayer with inventories, direct laborcosts must be included in inventory costsand may be recovered through cost of goodssold. See§ 1.263A–1(e)(2)(i)(B). A tax-payer may not rely on the provisions of sec-tion 8.01 of this APPENDIX to take a cur-rent year deduction.

.02 Timing of incurring liabilities forreal property taxes.

(1) Description of change. An ac-crual method taxpayer generally incurs aliability in the taxable year that all theevents have occurred that establish thefact of the liability, the amount of the lia-bility can be determined with reasonableaccuracy, and economic performance hasoccurred with respect to the liability. See§ 1.446–1(c)(1)(ii). Under §1.461–4(g)(6), if the liability of the tax-payer is to pay a tax, economic perfor-mance occurs as the tax is paid to the gov-ernment authority that imposed the tax.

(2) Scope. (a) Applicability. This change ap-

plies to an accrual method taxpayer thatwants to change its method of accounting to:

(i) treat a liability for real prop-erty taxes (for which the all events test of§ 461(h)(4) is otherwise met) as incurredin the taxable year in which the taxes arepaid, under §§ 461 and 1.461–4(g)(6);

(ii) account for real propertytaxes under the recurring item exceptionto the economic performance rules under§§ 461(h)(3) and 1.461–5(b)(1); or

(iii) revoke an election under §461(c) (ratable accrual election).

(b) Inapplicability. This changedoes not apply to a taxpayer that is subjectto § 263A and that is required to capitalizethe costs with respect to which the tax-payer wants to change its method of ac-counting under section 8.02 of this AP-PENDIX, if the taxpayer is notcapitalizing the costs as required.

(3) Amounts taken into account.Ap-plicable provisions of the Code, regula-tions, and other published guidance pre-scribe the manner in which a liability thathas been incurred is taken into account.

For example, for a taxpayer with invento-ries, certain real property taxes must beincluded in inventory costs and may berecovered through cost of goods sold. See§ 1.263A–1(e)(3)(ii)(L). A taxpayer maynot rely on the provisions of section 8.02of this APPENDIX to take a current yeardeduction.

.03 Timing of incurring liabilitiesunder a workers’ compensation act, tort,breach of contract, or violation of law.

(1) Description of change and scope. (a) Applicability. This change ap-

plies to an accrual method taxpayer thatwants to change its method of accountingfor self-insured liabilities (including anyamounts not covered by insurance, suchas a “deductible” amount under an insur-ance policy) arising under any workers’compensation act or out of any tort,breach of contract, or violation of law, totreating the liability for the workers’ com-pensation, tort, breach of contract, or vio-lation of law as being incurred in the tax-able year in which all the events haveoccurred which establish the fact of the li-ability, the amount of the liability can bedetermined with reasonable accuracy, andpayment is made to the person to whichthe liability is owed. See§§ 461 and1.461–4(g)(2).

(b) Inapplicability. This changedoes not apply:

(i) to a taxpayer that is subjectto § 263A and that is required to capitalizethe costs with respect to which the tax-payer wants to change its method of ac-counting under section 8.03 of this AP-PENDIX, if the taxpayer is notcapitalizing the costs as required;

(ii) if payment is made to a thirdparty rather than to the person to whichthe liability is owed. See§ 1.461–4(g)(1);or

(iii) if payment is made by athird party.

(2) Amounts taken into account.Applicable provisions of the Code, regu-lations, and other published guidance pre-scribe the manner in which a liability thathas been incurred is taken into account.For example, for a taxpayer with invento-ries, certain employee benefit costs (in-cluding workers’ compensation) must beincluded in inventory costs and may berecovered through costs of goods sold.See§ 1.263A– 1(e)(3)(ii)(D). A taxpayermay not rely on the provisions of section

8.03 of this APPENDIX to take a currentyear deduction.

.04 Timing of incurring liabilities forpayroll taxes.

(1) Applicability. This change ap-plies to:

(a) an accrual method employerthat wants to change its method of ac-counting for

(i) FICA and FUTA taxes to amethod consistent with the holding inRev. Rul. 96–51, 1996–2 C.B. 36 (Rev.Rul. 96–51 holds that, under the all eventstest of § 461, an accrual method employermay deduct in Year 1 its otherwise de-ductible FICA and FUTA taxes imposedwith respect to year-end wages properlyaccrued in Year 1, but paid in Year 2, ifthe requirements of the recurring item ex-ception are met); and

(ii) state unemployment taxesand, in the event the taxpayer is an em-ployer within the meaning of the RailroadRetirement Tax Act (see§ 3231(a)), rail-road retirement taxes to a method underwhich the taxpayer may deduct in Year 1its otherwise deductible state unemploy-ment taxes and railroad retirement taxes(if applicable) imposed with respect toyear-end wages properly accrued in Year1, but paid in Year 2, if the requirementsof the recurring item exception are met(including the requirement that, as of theend of the taxable year, all events haveoccurred that establish the fact of the lia-bility and the amount of the liability canbe determined with reasonable accuracy,see§ 1.461–5(b)); or

(b) an accrual method employer thatutilizes a method of accounting for FICAand FUTA taxes that is consistent with theholding in Rev. Rul. 96–51, 1996–2 C.B.36 and wishes to change its method of ac-counting for state unemployment taxesand, in the event the employer is an em-ployer within the meaning of the RailroadRetirement Tax Act (see§ 3231(a)), rail-road retirement taxes to a method underwhich the taxpayer may deduct in Year 1its otherwise deductible state unemploy-ment taxes and railroad retirement taxes(if applicable)imposed with respect toyear-end wages properly accrued in Year1, but paid in Year 2, if the requirementsof the recurring item exception are met(including the requirement that, as of theend of the taxable year, all events haveoccurred that establish the fact of the lia-

1999–52 I.R.B. 751 December 27, 1999

bility and the amount of the liability canbe determined with reasonable accuracy,see§ 1.461–5(b)).

(2) Inapplicability. This changedoes not apply to a taxpayer that is subjectto § 263A and that is required to capitalizethe costs with respect to which the tax-payer wants to change its method of ac-counting under section 8.04 of this AP-PENDIX, if the taxpayer is notcapitalizing the costs as required.

(3) Recurring item exception. A tax-payer that previously has not changed toor adopted the recurring item exceptionfor FICA, FUTA, state unemploymenttaxes and railroad retirement taxes (if ap-plicable) must change to the recurringitem exception method for FICA, FUTA,state unemployment taxes and railroad re-tirement taxes (if applicable) as specifiedin § 461(h)(3) as part of this change.

(4) Amounts taken into account. Ap-plicable provisions of the Code, regula-tions, and other published guidance pre-scribe the manner in which a liability thathas been incurred is taken into account.For example, for a taxpayer with invento-ries, certain taxes must be included in in-ventory costs and may be recoveredthrough cost of goods sold. See§ 1.263A–1(e)(3)(ii)(L). A taxpayer may not rely onthe provisions of section 8.04 of this AP-PENDIX to take a current year deduction.

.05 Cooperative advertising.(1) Description of change and scope.

This change applies to a taxpayer thatwants to change its method of accountingfor cooperative advertising costs to amethod consistent with the holding in Rev.Rul. 98–39, 1998–33 I.R.B. 4. Rev. Rul.98–39 generally provides that, under the allevents test of § 461, an accrual methodmanufacturer’s liability to pay a retailer forcooperative advertising services is incurredin the year in which the services are per-formed, provided the manufacturer is ableto reasonably estimate this liability, andeven though the retailer does not submit therequired claim form until the followingyear.

(2) Scope limitations inapplicable. Ataxpayer that wants to make this change forits first or second taxable year ending on orafter August 17, 1998, is not subject to thescope limitations in section 4.02 of this rev-enue procedure. However, if the taxpayeris under examination, before an appeals of-fice, or before a federal court, the taxpayer

must provide a copy of the application tothe examining agent(s), appeals officer, orcounsel for the government, as appropriate,at the same time that it files the copy of theapplication with the national office. Theapplication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel for thegovernment, as appropriate.

SECTION 8A. CERTAIN PAYMENTSFOR THE USE OF PROPERTY ORSERVICES (§ 467)

.01 Change to constant rental accrualmethod.

(1) Description of change.Thischange applies to a taxpayer that wants tochange to the constant rental accrualmethod, as described in § 1.467–3, for allof its section 467 rental agreements de-scribed in § 1.467–8(b). See§ 1.467–8.

(2) Requirements. Taxpayers chang-ing their method of accounting in accor-dance with this change must do so for allof their section 467 rental agreements de-scribed in § 1.467–8(b). This changemust be made for the taxpayer’s first tax-able year ending after May 18, 1999.

(3) Scope limitations inapplicable.The scope limitations in section 4.02 of thisrevenue procedure are not applicable to thischange. However, if the taxpayer is underexamination, before an appeals office, orbefore a federal court, the taxpayer mustprovide a copy of the application to the ex-amining agent(s), appeals officer, or coun-sel for the government, as appropriate, atthe same time that it files the copy of theapplication with the national office. Theapplication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel for thegovernment, as appropriate.

.02 Change to comply with §§ 1.467–1through 1.467–7.

(1) Description of change. Thischange applies to a taxpayer that wants tochange its method of accounting for rentalagreements described in § 1.467–9(a)(2)to comply with §§ 1.467–1 through1.467–7. See § 1.467–9(e)(1).

(2) Requirements.This change mustbe made for the taxpayer’s first taxableyear ending after May 18, 1999.

(3) Scope limitations inapplicable.The scope limitations in section 4.02 of thisrevenue procedure are not applicable to this

change. However, if the taxpayer is underexamination, before an appeals office, orbefore a federal court, the taxpayer mustprovide a copy of the application to the ex-amining agent(s), appeals officer, or coun-sel for the government, as appropriate, atthe same time that it files the copy of theapplication with the national office. Theapplication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel for thegovernment, as appropriate.

(4) Manner of making the change.This change is made using a cut-offmethod and applies only to rental agree-ments described in § 1.467–9(a)(2). Seesection 2.06 of this revenue procedure.For purposes of this paragraph (4), arental agreement is entered into on itsagreement date (within the meaning of §1.467–1(h)(1) and, if applicable, §1.467–1(f)(1)(i)).

.03 Change to comply with regulationproject IA–292–84.

(1) Description of the change.Thischange applies to a taxpayer that wants tochange its method of accounting for anyrental agreement described in §1.467–9(c) to comply with the provisionsof regulation project IA–292–84 (1996–2C.B. 462).

(2) Requirements. This change mustbe made for the taxpayer’s first taxableyear ending after May 18, 1999.

(3) Scope limitations inapplicable.The scope limitations in section 4.02 of thisrevenue procedure are not applicable to thischange. However, if the taxpayer is underexamination, before an appeals office, orbefore a federal court, the taxpayer mustprovide a copy of the application to the ex-amining agent(s), appeals officer, or coun-sel for the government, as appropriate, atthe same time that it files the copy of theapplication with the national office. Theapplication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel for thegovernment, as appropriate.

SECTION 9. INVENTORIES (§ 471)

.01 Cash discounts — Description ofchange and scope.This change applies toa taxpayer that wants to change itsmethod of accounting for cash discounts(discounts granted for timely payment)when they approximate a fair interest rate,

December 27, 1999 752 1999–52 I.R.B.

from a method of consistently includingthe price of the goods before discount inthe cost of the goods and including ingross income any discounts taken (the“gross invoice method”), to a method ofreducing the cost of the goods by the cashdiscounts and deducting as an expenseany discounts not taken (the “net invoicemethod”), or vice versa. SeeRev. Rul.73–65, 1973–1 C.B. 216.

.02 Estimating inventory “shrinkage”.(1) Description of change and scope.

This change applies to a taxpayer thatwants to change to a method of account-ing for estimating inventory shrinkage incomputing ending inventory, using:

(a) the “retail safe harbor method”described in section 4 of Rev. Proc.98–29, 1998–15 I.R.B. 22; or

(b) a method other than the retailsafe harbor method, provided (i) the tax-payer’s present method of accountingdoes not estimate inventory shrinkage,and (ii) the taxpayer’s new method of ac-counting (that estimates inventory shrink-age) clearly reflects income under §446(b).

(2) Scope limitations inapplicable.A taxpayer that wants to make this changeis not subject to the scope limitations insection 4.02 of this revenue procedure.However, if the taxpayer is under exami-nation, before an appeals office, or beforea federal court, the taxpayer must providea copy of the application to the examiningagent(s), appeals officer, or counsel forthe government, as appropriate, at thesame time that it files the copy of the ap-plication with the national office. The ap-plication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

(3) Additional requirements. If thetaxpayer wants to change to a method ofaccounting for inventory shrinkage otherthan the retail safe harbor method, thetaxpayer must attach to the application astatement setting forth a detailed descrip-tion of all aspects of the new method ofestimating inventory shrinkage (includ-ing, for LIFO taxpayers, the method ofdetermining inventory shrinkage for, orallocating inventory shrinkage to, eachLIFO pool).

(4) Audit protection. A taxpayer,whose present method of accounting esti-mates inventory shrinkage, does not re-

ceive audit protection under section 7 ofthis revenue procedure in connection witha change to the retail safe harbor methodif, on the date the taxpayer files a copy ofthe Form 3115 with the national office,the taxpayer’s present method of estimat-ing inventory shrinkage is an issue underconsideration within the meaning of sec-tion 3.09 of this revenue procedure.

(5) Future change. A taxpayer thatchanges to the retail safe harbor methoddescribed in this revenue procedure willnot be precluded, solely by reason of suchchange, from changing to another safeharbor method for estimating inventoryshrinkage in computing ending inventoryin the first year that such other safe harbormethod is available.

SECTION 10. LAST-IN, FIRST-OUT(LIFO) INVENTORIES (§ 472)

.01 Change from the LIFO inventorymethod.

(1) Description of change and scope.(a) In general. This change ap-

plies to any taxpayer that wants to:(i) change from the LIFO in-

ventory method for all its LIFO inven-tory; and

(ii) change to the permittedmethod as determined in section10.01(1)(b) of this APPENDIX.

(b) Method to be used. (i) Determining method to be

used. The inventory method to be usedby a taxpayer is determined as follows:

(A) If the taxpayer hasinventoriable goods not included in itsLIFO inventory computations (non-LIFOinventory) and, for all the taxpayer’snon-LIFO inventory, the taxpayer uses aninventory method that is a permittedmethod, then the taxpayer must use thatsame inventory method for its entireinventory.

(B) If the LIFO inventorymethod is used by the taxpayer withrespect to all its inventoriable goods,then the taxpayer must use the sameinventory method it used prior to theadoption of the LIFO inventory method,if that prior method is a permittedmethod.

(C) If the taxpayer has onlyLIFO inventory and the method used bythe taxpayer prior to the adoption of theLIFO inventory method is not a permit-

ted method, then the taxpayer must use apermitted method.

(D) If the taxpayer did notuse an inventory method prior to theadoption of the LIFO inventory methodand has no inventoriable goods otherthan its LIFO inventory, then the taxpay-er must use a permitted method.

(ii) Permitted method defined.For purposes of section 10.01 of this AP-PENDIX, a permitted method is a methodunder which:

(A) the identification methodis either the first-in, first-out (FIFO)inventory method or the specific identifi-cation inventory method; and

(B) the valuation method iscost; cost or market, whichever is lower;market (but only if the taxpayer is a deal-er in securities, as defined in § 1.471–5);the “farm price method” or the “unit-livestock-price method” (but only if thetaxpayer is a farmer permitted to usesuch methods); or the retail method,reduced to either approximate cost orapproximate cost or market, whichever islower (but only if the taxpayer is a retailmerchant).

(iii) Method not to be used. Theaverage cost method (sometimes also re-ferred to as “the rolling average method”)described in Rev. Rul. 71–234, 1971–1C.B. 148, is not a permitted method.

(iv) Determining permittedmethod. Whether an inventory method isa permitted method is determined by thetaxpayer’s method of inventory identifi-cation and valuation, and not by whichtypes and amounts of costs are capitalizedunder the taxpayer’s method of comput-ing inventory cost. See§ 263A and theregulations thereunder, which govern thetypes and amounts of costs required to beincluded in inventory cost for taxpayerssubject to those provisions.

(2) Limitation on LIFO election.The taxpayer may not re-elect the LIFOinventory method for a period of at leastfive taxable years beginning with the yearof change, unless based on a showing ofunusual and compelling circumstances,consent is specifically granted by theCommissioner to change the method ofaccounting at an earlier time. A taxpayerthat wants to re-elect the LIFO inventorymethod within a period of five taxableyears (beginning with the year of change)must file a Form 3115 in accordance with

1999–52 I.R.B. 753 December 27, 1999

Rev. Proc. 97–27, 1997–1 C.B. 680. Ataxpayer that wants to re-elect the LIFOinventory method after a period of fivetaxable years (beginning with the year ofchange) is not required to file a Form3115 in accordance with Rev. Proc.97–27, but must file a Form 970, Applica-tion to Use LIFO Inventory Method, inaccordance with § 1.472–3.

(3) Effect of subchapter S election bycorporation.

(a) S election effective for year ofLIFO discontinuance. If a C corporationelects to be treated as an S corporation forthe taxable year in which it discontinuesuse of the LIFO inventory method, §1363(d) requires an increase in the tax-payer’s gross income for the LIFO recap-ture amount (as defined in § 1363(d)(3))for the taxable year preceding the year ofchange (the taxpayer’s last taxable year asa C corporation), and a corresponding ad-justment to the basis of the taxpayer’s in-ventory as of the end of the taxable yearpreceding the year of change. Any in-crease in income tax as a result of the in-clusion of the LIFO recapture amount ispayable in four equal installments, begin-ning with the taxpayer’s last taxable yearas a C corporation as provided in §1363(d)(2). Any corresponding basis ad-justment is taken into account in comput-ing the § 481(a) adjustment (if any) thatresults upon the discontinuance of theLIFO method by the corporation.

(b) S election effective for a yearafter LIFO discontinuance.If a C corpora-tion elects to be treated as an S corporationfor a taxable year after the taxable year inwhich it discontinued use of the LIFO in-ventory method, the remaining balance ofany positive § 481(a) adjustment must beincluded in its gross income in its last tax-able year as a C corporation. If this inclu-sion results in an increase in tax for its lasttaxable year as a C corporation, this in-crease in tax is payable in four equal install-ments, beginning with the taxpayer’s lasttaxable year as a C corporation as providedin § 1363(d)(2), unless the taxpayer is re-quired to take the remaining balance of the§ 481(a) adjustment into account in the lasttaxable year as a C corporation under an-other acceleration provision in section5.02(3)(c) of this revenue procedure.

(4) Additional requirements.The tax-payer must complete the following state-ments and attach them to the application:

(a) “The new method of identify-ing inventory goods is the [insert method;that is, specific identification; FIFO; re-tail; etc.] method.”

(b) “The new method of valuing in-ventory goods is [insert method; that is, cost;cost or market, whichever is lower; etc.].”

(c) “The new method conforms tothe requirements of section 10.01(1)(b)(i)[insert either (A), (B), (C), or (D)] of theAPPENDIX of Rev. Proc. 99–49 because[explain in detail how the new methodconforms to the specific subdivision].”

.02 Determining the cost of used vehi-cles purchased or taken as a trade-in.

(1) Description of change and scope.This change applies to a LIFO taxpayerthat wants to:

(a) determine the cost of used vehi-cles acquired by trade-in using the aver-age wholesale price listed by an officialused car guide on the date of the trade-in.SeeRev. Rul. 67–107, 1967–1 C.B. 115.The official used car guide selected mustbe consistently used;

(b) determine the cost of used ve-hicles purchased for cash using the actualpurchase price of the vehicle; or

(c) reconstruct the beginning-of-the-year cost of used vehicles purchasedfor cash using values computed by na-tional auto auction companies based onvehicles purchased for cash. The nationalauto auction company selected must beconsistently used.

(2) Manner of making the change.This change is made using a cut-offmethod and applies to used vehicles ac-quired during the year of change and allsubsequent years. Seesection 2.06 of thisrevenue procedure.

.03 Alternative LIFO inventory methodfor retail automobile dealers.

(1) Description of change and scope. (a) Applicability. This change ap-

plies to a taxpayer engaged in the trade orbusiness of retail sales of new automobilesor new light-duty trucks (“automobiledealer”) that wants to change to the “Alter-native LIFO Method” described in section4 of Rev. Proc. 97–36, 1997–2 C.B. 450,for its LIFO inventories of new automo-biles and new light-duty trucks. Light-dutytrucks are trucks with a gross vehicleweight of 14,000 pounds or less, which alsoare referred to as class 1, 2, or 3 trucks.

(b) Inapplicability. This changedoes not apply to an automobile dealer

that uses the inventory price index com-putation (IPIC) method for goods otherthan new automobiles, new light-dutytrucks, parts and accessories, used auto-mobiles, and used trucks.

(2) Manner of making the change. (a) Cut-off method.This change is

made using a cut-off method. Seesection2.06 of this revenue procedure and sec-tion 5.03(6) of Rev. Proc. 97–36.

(b) IPIC method changes. An au-tomobile dealer that uses the IPIC methodalso must change from the IPIC methodunder section 10.03 of this APPENDIX toanother acceptable method for its goodsother than new automobiles and newlight-duty trucks. For parts and acces-sories, the automobile dealer must changeto the dollar-value, index method, with allparts and accessories within each separatetrade or business in a separate LIFO pool.For used vehicles, the automobile dealermust change to the dollar-value, link-chain method, with all used automobileswithin each separate trade or business inone LIFO pool and all used trucks withineach separate trade or business in anotherseparate LIFO pool.

(c) Additional requirements. Anautomobile dealer also must comply withthe following:

(i) the conditions in section5.03 of Rev. Proc. 97–36; and

(ii) for an automobile dealerchanging from the IPIC method, the auto-mobile dealer also must attach to the ap-plication a schedule setting forth theclasses of goods for which the automobiledealer has elected to use the LIFO methodand the accounting method changes beingmade under section 10.03 of this APPEN-DIX for each class of goods.

.04 Inventory price index computation(IPIC) method under the LIFO inventorymethod.

(1) Description of change and scope. (a) This change applies to an eligi-

ble taxpayer that wants to change itsLIFO inventory method to use the IPICmethod for its entire LIFO inventory inaccordance with all the provisions of §1.472–8(e)(3) and Rev. Proc. 84–57,1984–2 C. B. 496. The taxpayer must:

(i) in the case of the CPI De-tailed Report, select an index from Table3 (Consumer Price Index for All UrbanConsumers (CPI-U): U.S. city average,detailed expenditure categories); and

December 27, 1999 754 1999–52 I.R.B.

(ii) in the case of the ProducerPrice Indexes, select an index from Table6 (Producer price indexes and percentchanges for commodity groupings and in-dividual items).

(b) A taxpayer using the IPICmethod must apply the inventory priceindex to its ending inventory valued atcurrent-year cost, under the taxpayer’smethod of determining current-yearcost. See§ 1.472–8(e)(2)(ii). Further-more, there must be a nexus between thetaxpayer’s method of determining cur-rent-year costs and the month to be usedin selecting indexes. See §1.472–8(e)(3)(ii i)(C) and Rev. Rul.89–29, 1989–1 C.B. 168. For example,if a taxpayer determines current-yearcost by reference to the actual cost ofgoods purchased or produced during thetaxable year in the order of acquisition(earliest acquisitions cost), then the in-ventory price index must be applied tothe earliest acquisitions cost of endinginventory. In computing the inventoryprice index, such a taxpayer must selectindexes from a month toward the begin-ning of its taxable year.

(c) A taxpayer may not change itsmethod of pooling as part of a change madeunder section 10.04 of this APPENDIX,except to a method specifically authorizedby § 1.472–8(e)(3)(iv) or section 3.04(1)(b)of Rev. Proc. 84–57. These special poolingrules do not apply to goods manufacturedby the taxpayer. See § 1.472–8(b) for prin-ciples for establishing pools of manufactur-ers and processors.

(d) A taxpayer may change itsmethod of determining current-year costas part of a change made under section10.04 of this APPENDIX by also follow-ing the provisions of section 10.05 of thisAPPENDIX. These changes may bemade using a single application, providedthe application is labeled as being filedunder both sections 10.04 and 10.05 ofthis APPENDIX. Seesection 6.02(3) ofthis revenue procedure.

(2) Manner of making the change.This change is made using a cut-offmethod. Seesection 2.06 of this revenueprocedure.

(3) Bargain purchase. If the tax-payer has previously improperly ac-counted for a bulk bargain purchase, thetaxpayer must, as part of this change, firstchange its method of accounting to com-

ply with Hamilton Industries, Inc. v. Com-missioner, 97 T.C. 120 (1991), and com-pute a § 481(a) adjustment for that part ofthe change. SeeAnnouncement 91–173,1991–47 I.R.B. 29. Upon examination, ifa taxpayer has properly changed undersection 10.04 of this APPENDIX exceptfor complying with section 10.04(3) ofthis APPENDIX, an examining agent maynot deny the taxpayer the change. How-ever, the taxpayer does not receive auditprotection under section 7 of this revenueprocedure with respect to the impropermethod of accounting for the bargain pur-chase. Accordingly, the examining agentmay make any necessary adjustments inany open year to effect compliance withHamilton Industries, Inc.

.05 Determining current-year costunder the LIFO inventory method.

(1) Description of change and scope.This change applies to a LIFO taxpayerthat wants to change to a method of deter-mining current year cost:

(a) by reference to the actual costof the goods most recently purchased orproduced;

(b) by reference to the actual costof the goods purchased or produced dur-ing the taxable year in the order of acqui-sition; or

(c) by application of an averageunit cost equal to the aggregate actual costof all the goods purchased or producedthroughout the taxable year divided by thetotal number of units so purchased or pro-duced. See§ 1.472–8(e)(2)(ii).

(2) Manner of making the change.This change is made using a cut-offmethod. Seesection 2.06 of this revenueprocedure.

SECTION 10A. MARK-TO-MARKETACCOUNTING METHOD FORDEALERS IN SECURITIES (§ 475)

.01 Discontinuing the mark-to-marketmethod of accounting for nonfinancialcustomer paper.

(1) Description of change and scope. (a) Applicability. This change ap-

plies to:(i) a taxpayer that must discon-

tinue the use of the mark-to-marketmethod of accounting for nonfinancialcustomer paper to comply with §475(c)(4), enacted by § 7003 of the IRSRestructuring and Reform Act of 1998,

Pub. L. No. 105–206, 112 Stat. 833 (July22, 1998), provided the change is madefor the taxpayer’s first taxable year end-ing after July 22, 1998. The taxpayermust change to a method other than thelower of cost or market method; and

(ii) a taxpayer that was a dealerin securities solely because of its dealingsin nonfinancial customer paper, that, inconjunction with the change under section10A.01(1)(a)(i) of this APPENDIX,wants to discontinue the use of the mark-to-market method of accounting for all se-curities (including nonfinancial customerpaper).

(b) Scope limitations inapplicable.A taxpayer that wants to make this changeis not subject to the scope limitations insection 4.02 of this revenue procedure.However, if the taxpayer is under exami-nation, before an appeals office, or beforea federal court, the taxpayer must providea copy of the application to the examiningagent(s), appeals officer, or counsel forthe government, as appropriate, at thesame time that it files the copy of the ap-plication with the national office. The ap-plication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

(2) Additional Requirements.(a) On a statement attached to the

application, the taxpayer must describe allitems that were marked to market and thatwill no longer be marked to market.

(b) When complying with section6.02(3) of this revenue procedure, the tax-payer should indicate whether the tax-payer is changing under section10A.01(1)(a)(i) or sections10A.01(1)(a)(i) and (ii) of this APPEN-DIX.

(3) No audit protection. A taxpayerdoes not receive audit protection undersection 7 of this revenue procedure inconnection with this change.

.02 Commodities dealers, securitiestraders, and commodities traders electingto use the mark-to-market method of ac-counting under § 475(e) or (f).

(1) Description of change. Thischange applies to certain taxpayers thathave elected to use the mark-to-marketmethod of accounting under § 475(e) or (f).Under § 475(e) and (f) and Rev. Proc.99–17, 1999–7 I.R.B. 52, if a taxpayermakes an election under § 475(e) or (f),

1999–52 I.R.B. 755 December 27, 1999

then beginning with the first taxable yearfor which the election is effective (electionyear), mark to market is the only permissi-ble method of accounting for securities orcommodities subject to the election. Thus,if the electing taxpayer’s method of ac-counting for its taxable year immediatelypreceding the election year is inconsistentwith § 475, the taxpayer is required tochange its method of accounting to complywith the election. A taxpayer that makes a§ 475(e) or (f) election but fails to changeits method of accounting to comply withthat election is using an impermissiblemethod. Seesection 4 of Rev. Proc. 99–17.

(2) Scope(a) Applicability. This change ap-

plies to a taxpayer if all of the followingconditions are satisfied:

(i) The taxpayer is a commoditiesdealer, securities trader, or commoditiestrader that has made a valid election under§ 475(e) or (f) (seesection 5.02 or 5.03(1)of Rev. Proc. 99–17) and that is requiredto change its method of accounting tocomply with the election;

(ii) The method of accounting towhich the taxpayer changes is in accor-dance with its election under § 475(e) or(f);and

(iii) The year of change is theelection year.

(b) Scope limitations inapplicable.A taxpayer making this change is not sub-ject to the scope limitations in section4.02 of this revenue procedure. However,if the taxpayer is under examination, be-fore an appeals office, or before a federalcourt, the taxpayer must provide a copy ofthe application to the examining agent(s),appeals officer, or counsel for the govern-ment, as appropriate, at the same time thatit files the copy of the application with thenational office. The application mustcontain the name(s) and telephone num-ber(s) of the examining agent(s), appealsofficer, or counsel for the government, asappropriate.

SECTION 11. BANK RESERVES FORBAD DEBTS (§ 585)

.01 Changing from the § 585 reservemethod to the § 166 specific charge-offmethod.

(1) Description of change and scope.(a) Applicability. This change ap-

plies to a bank (as defined in § 581, in-

cluding a bank for which a qualified sub-chapter S subsidiary (QSSS) election isfiled) that wants to change its method ofaccounting for bad debts from the § 585reserve method to the § 166 specificcharge-off method.

(b) Certain scope limitations inap-plicable. A bank that changed from the §593 reserve method under § 593(g) to the§ 585 reserve method will not be prohib-ited under section 4.02(6) of this revenueprocedure from changing its method ofaccounting for bad debts under section11.01 of this APPENDIX solely becauseof the § 593(g) change. A bank for whicha QSSS election is filed will not be pro-hibited under section 4.02(7) of this rev-enue procedure from changing its methodof accounting for bad debts under section11.01 of this APPENDIX solely becauseof the deemed liquidation of the bankarising from a QSSS election.

(c) Inapplicability. This changedoes not apply to a large bank as definedin § 585(c)(2).

(2) Section 481(a) adjustment.Generally, the amount of the § 481(a)adjustment for a change in method ofaccounting under section 11.01 of thisAPPENDIX is the amount of the bank’sreserve for bad debts as of the close ofthe taxable year immediately before theyear of change. However, the amount ofthe § 481(a) adjustment does not includethe amount of a bank’s pre-1988 re-serves (as described in §593(g)(2)(A)(ii), without taking into ac-count § 593(g)(2)(B)) i f the bankchanged in a prior year from the § 593reserve method to the § 585 reservemethod and § 593(g) applied to thatchange. The deemed liquidation of abank occurring solely because its parentmakes a QSSS election does not acceler-ate the § 481(a) adjustment. In accor-dance with section 5.04(3)(c) of thisrevenue procedure, a bank that ceases tobe a bank under § 581 must accelerateits § 481(a) adjustment.

(3) Change from § 585 required whenelecting S corporation status. A bankelecting S corporation status (or a bank forwhich a QSSS election is filed) cannot usethe § 585 reserve method. The filing by abank of a Form 2553 (Election by a SmallBusiness Corporation) or the filing by abank’s parent of a QSSS election with re-spect to the bank will constitute an agree-

ment by the bank to change its method ofaccounting for bad debts from the § 585reserve method to the § 166 specificcharge-off method effective as of the tax-able year for which the S corporation elec-tion or QSSS election is effective (year ofchange) in accordance with all of the ap-plicable provisions of this revenue proce-dure (including section 6 of this revenueprocedure, which requires filing a Form3115 in duplicate). The § 481(a) adjust-ment is recognized built-in gain under §1374. See§ 1.1374–4(d).

.02 Reserved.

SECTION 12. ORIGINAL ISSUEDISCOUNT (§§ 1272; 1273)

.01 De minimis original issue discount(OID).

(1) Description of change and scope. (a) Applicability. This change ap-

plies to a taxpayer that wants to change tothe principal-reduction method of ac-counting described in section 5 of Rev.Proc. 97–39, 1997–2 C.B. 485. The prin-cipal-reduction method of accounting isan aggregate method of accounting for deminimis OID (discount) on certain loansoriginated by the taxpayer.

(b) Scope limitations inapplicable.A taxpayer that wants to make this changeis not subject to the scope limitations insection 4.02 of this revenue procedure.However, if the taxpayer is under exami-nation, before an appeals office, or beforea federal court, the taxpayer must providea copy of the application to the examiningagent(s), appeals officer, or counsel forthe government, as appropriate, at thesame time that it files the copy of the ap-plication with the national office. The ap-plication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

(c) Description. The principal-re-duction method of accounting is a permis-sible method for use by taxpayers to ac-count for discount on one or morecategories of loans described in section4.02 or 4.03 of Rev. Proc. 97–39. If theprincipal-reduction method is used to ac-count for any loans in a category of loans,the method must be used for the entirecategory of loans. The principal-reduc-tion method applies only to loans de-scribed in section 3 of Rev. Proc. 97–39.

December 27, 1999 756 1999–52 I.R.B.

(2) Manner of making the change. (a) This change is made using a

cut-off method and applies only to loansdescribed in section 3 of Rev. Proc. 97–39that were acquired on or after the first dayof the year of change. Seesection 2.06 ofthis revenue procedure.

(b) The taxpayer must maintainbooks and records sufficient to satisfy thedistrict director that old and new loanshave been adequately segregated.

(3) Additional requirements.On astatement attached to the application, thetaxpayer must:

(a) identify the categories of loansto which the new method will apply; and

(b) describe any “additional cate-gories” permitted under section 4.03 ofRev. Proc. 97–39.

(4) No audit protection. A taxpayerdoes not receive audit protection undersection 7 of this revenue procedure inconnection with this change.

.02 Pool of debt instruments.(1) Description of change and scope.

(a) Applicability. This change ap-plies to a taxpayer that must change itsmethod of accounting for a pool of debtinstruments to comply with § 1272(a)(6)(as required by § 1004 of the TaxpayerRelief Act of 1997, Pub. L. No. 105–34,111 Stat. 788, 911), provided the changeis for the taxpayer’s first taxable year be-ginning after August 5, 1997.

(b) Scope limitations inapplicable.A taxpayer that must make this change isnot subject to the scope limitations in sec-tion 4.02 of this revenue procedure.However, if the taxpayer is under exami-nation, before an appeals office, or beforea federal court, the taxpayer must providea copy of the application to the examiningagent(s), appeals officer, or counsel forthe government, as appropriate, at thesame time that it files the copy of the ap-plication with the national office. The ap-plication must contain the name(s) andtelephone number(s) of the examiningagent(s), appeals officer, or counsel forthe government, as appropriate.

(c) Description.(i) Under § 1272, the holder of a

debt instrument with original issue discount(OID) must include in income the sum ofthe daily portions of the OID for each dayduring the taxable year on which the holderheld the instrument. Section 1272(a)(6)provides special rules to determine the

daily portions of OID for certain debt in-struments subject to prepayments. Underthese rules, the daily portions of OID aredetermined, in part, by taking into accountan assumption regarding the prepayment ofprincipal on the debt instruments.

(ii) Section 1004 of the Tax-payer Relief Act of 1997, which is effec-tive for taxable years beginning after Au-gust 5, 1997, extended the rules in §1272(a)(6) to any pool of debt instru-ments the yield on which may be affectedby reason of prepayments. In particular, §1272(a)(6) now applies to a pool of creditcard receivables subject to a grace periodprovision (under which, for example, acredit card issuer does not charge interestfor a billing cycle if the credit cardobligor pays off its account balance by aspecified date, even though the balance isnot due on that date). SeeH.R. Conf.Rep. No. 220, 105th Cong., 1st Sess. 522(1997). (A credit card receivable subjectto a grace period provision has OID be-cause none of the stated interest on the re-ceivable is qualified stated interest under§ 1.1273–1(c)).

(iii) The holder of a pool of creditcard receivables subject to a grace periodprovision must accrue OID on the poolbased on a reasonable assumption regard-ing the timing of the payments by the oblig-ors of the receivables in the pool. Under§1272(a)(6), it is not reasonable for aholder to assume that all of the obligors willpay their balances by the specified graceperiod date and, based on this assumption,defer the inclusion of OID until the end ofthe grace period. If the payments in thepool occur soon after year end and beforethe holder files its tax return for the taxableyear that includes such year end, the holdermay accrue OID based on its actual experi-ence rather than based upon a reasonableassumption. If the holder does not accrueOID based on its actual experience, theholder must make an adjustment to its in-come for the following taxable year to ac-count for any difference between its accrualbased on a reasonable assumption and itsactual experience.

(2) Additional requirements.On astatement attached to the application, thetaxpayer must provide a detailed descrip-tion of the pool(s) of debt instruments andthe proposed method (including the pre-payment assumption used for each pool).

SECTION 12A. MARKET DISCOUNTBONDS (§ 1278)

.01 Revocation of § 1278(b) election.(1) Description of change and scope.

This change applies to a taxpayer thatwants to change its method of accountingfor market discount bonds by revoking its§ 1278(b) election. Under § 1278(b), ataxpayer may elect a method of account-ing under which market discount is cur-rently included in gross income for thetaxable years to which the discount is at-tributable. See Rev. Proc. 92–67, 1992–2C.B. 429, for the procedures to make a §1278(b) election (including a deemed §1278(b) election). The procedures for re-voking a § 1278(b) election were for-merly provided in section 7 of Rev. Proc.92–67.

(2) Revocation of election.The re-vocation of a § 1278(b) election ap-plies to all market discount bonds that areheld by the taxpayer on the first day of thefirst taxable year for which the revocationis effective (year of change), and to allmarket discount bonds that are subse-quently acquired by the taxpayer. If a §1278(b) election is revoked, then, for pur-poses of § 1276(a), accrued market dis-count with respect to any bond previouslysubject to the election means accruedmarket discount as defined in § 1276(b)less any market discount included in in-come while the bond was subject to the §1278(b) election.

(3) Manner of making the change.This change is made using a cut-offmethod and applies only to market dis-count accruing on or after the first day ofthe year of change. Market discount ac-cruing on a bond prior to the year ofchange was currently included in incomeand market discount accruing on the bondon and after the first day of the year ofchange is included in income generallyupon disposition of the bond. See §1276(a). Because cut-off treatment is pre-scribed for this change, the basis of anybond, adjusted for amounts previously in-cluded in income during the period of theelection, is not affected by the revocation.

(4) Additional requirements. On astatement attached to the application, thetaxpayer must provide:

(a) the reason(s) for revoking the §1278(b) election (or deemed § 1278(b)election);

1999–52 I.R.B. 757 December 27, 1999

(b) a description of the method bywhich, and the date on which, the tax-payer made the § 1278(b) election (ordeemed § 1278(b) election) that is beingrevoked; and

(c) a statement that, after the revo-cation, the taxpayer will not make a con-stant interest rate election for any bondthat has been subject to the § 1278(b)election (or deemed § 1278(b) election)being revoked and for which a constantinterest rate election was not effective inthe year of acquisition.

(5) Audit protection. A taxpayer re-ceives audit protection under section 7 ofthis revenue procedure in connection withthis change. However, the audit protec-tion applicable to this change does notpreclude the Commissioner from examin-ing the method used by the taxpayer todetermine the amount of accrued marketdiscount under § 1276(b) for a taxableyear prior to the year of change.

.02 Reserved.

SECTION 13. SHORT-TERMOBLIGATIONS (§ 1281)

.01 Interest income on short-termobligations.

(1) Description of change and scope.(a) This change applies to a tax-

payer that wants to change its method ofaccounting to comply with § 1281 for in-terest income on short-term obligations.

(b) Under § 1281, a holder of cer-tain short-term obligations, including abank as defined in § 581, must include ingross income any accrued interest incomeon such obligations, regardless of theholder’s overall method of accounting.Section 1281 applies to all types of inter-est income, including acquisition dis-count, original issue discount (OID), andstated interest. SeeS. Rep. No. 99–313,99th Cong., 2d Sess. 903 (1986), 1986–3(Vol. 3) C.B. 903.

(c) Section 1283(a)(1) generallydefines a short-term obligation as anybond, debenture, note, certificate, or otherevidence of indebtedness that matures inone year or less from its issue date. Ashort-term loan, including a short-termloan made in the ordinary course of thetaxpayer’s business, is a short-term oblig-ation.

(d) Under §§ 1281(a) and 1283(c),a holder of a short-term obligation subject

to § 1281 must include in gross income anamount equal to the sum of the daily por-tions of the acquisition discount or OID,whichever is applicable, on the obligationfor each day during the taxable year thatthe obligation is held by the holder. See §1283(b), as modified by § 1283(c), to de-termine the daily portions of acquisitiondiscount or OID. In addition, § 1281(a)requires the holder to include in gross in-come any stated interest that is payable onthe short-term obligation (other thanstated interest taken into account to deter-mine the amount of the acquisition dis-count or OID) as it accrues.

(2) Section 481(a) adjustment pe-riod. A taxpayer must take the entire §481(a) adjustment into account in com-puting taxable income for the year ofchange.

.02 Stated interest on short-term loansof cash method banks in the Eighth Cir-cuit.

(1) Description of change and scope.(a) This change applies to a cash

method bank in the Eighth Circuit thatwants to change its method of accountingfrom accruing stated interest on short-term loans made in the ordinary course ofbusiness to using the cash method for thatinterest.

(b) In Security Bank Minnesota v.Commissioner,994 F.2d 432 (8th Cir.1993), aff ’g 98 T.C. 33 (1992), the U.S.Circuit Court of Appeals for the EighthCircuit held that § 1281 does not require acash method bank to include in gross in-come stated interest on short-term loansmade in the ordinary course of business asthat interest accrues. The Service dis-agrees with the interpretation of § 1281 inSecurity Bank Minnesotaand intends topursue this issue in other circuits. In lightof Security Bank Minnesota,however,cash method banks in the Eighth Circuitwill be granted permission to change tothe cash method of accounting for statedinterest on short-term loans made in theordinary course of business. If thischange was made on or before November6, 1995, the Service will not seek to denycash method banks in the Eighth Circuitthe use of the cash method on the groundthat there was an unauthorized change inmethod of accounting.

(2) Section 481(a) adjustment pe-riod. A taxpayer must take the entire §481(a) adjustment into account in com-

puting taxable income for the year ofchange.

(3) No ruling protection. If the Ser-vice is later successful in further litigationon this issue in other circuits, or there is achange in law, then cash method banks inthe Eighth Circuit may be required to usean accrual method of accounting for anytaxable year not barred by the statute oflimitations.

26 CFR 601.602: Tax forms and instructions. (AlsoPart I, §§ 138, 220, 408, 408A, 529, 530, 1441,1442, 1443, 3402, 3405, 3406, 6011, 6041, 6041A,6042, 6043, 6044, 6045, 6047, 6049, 6050A, 6050B,6050D, 6050E, 6050H, 6050J, 6050N, 6050P,6050Q, 6050R, 6050S; 1.408–7, 1.408A–7,1.1461–1, 1.1461–2, 31.3402(q)–1, 31.3404(r)–1,31.3405(c)–1, 35.3405–1, 31.3406(a)–1,31.3406(g)–2, 35a.3406–2, 1.6011–1, 1.6011–3,1.6041–1, 7.6041–1, 1.6041A–1, 1.6042–2,1.6044–2, 1.6045–1, 1.6045–2, 1.6045–4, 1.6049–4,1.6050A–1, 1.6050E–1, 1.6050H–1, 1.6050J–1T,1.6050N–1, and 1.6050P–1.)

Rev. Proc. 99–50

SECTION 1. PURPOSE

This revenue procedure permits com-bined information reporting by a succes-sor business entity (i.e., a corporation,partnership, or sole proprietorship) in cer-tain situations following a merger or anacquisition and supersedes Rev. Proc.90–57, 1990–2 C.B. 641 and Rev. Rul.69–556, 1969–2 C.B. 242. This revenueprocedure explains both the procedureotherwise required under the regulations(the “standard procedure”) and an elec-tive procedure (the “alternative proce-dure”) for preparing and filing certainForms 1042–S, all forms in the series1098, 1099, and 5498, and Forms W-2G,in certain situations involving a successorbusiness entity and a predecessor businessentity (i.e., a corporation, partnership, orsole proprietorship) when the successoracquires substantially all of the property(1) used in the trade or business of thepredecessor (including certain situationswhen one or more corporations are ab-sorbed by another corporation pursuant toa merger agreement), or (2) used in a sep-arate unit of a trade or business of the pre-decessor.

SECTION 2. BACKGROUND

.01 General Requirement of Return or

December 27, 1999 758 1999–52 I.R.B.

Statement. Section 6011(a) of the Inter-nal Revenue Code provides that, whenrequired by regulations, any personmade liable for any tax imposed by theCode, or for the collection of the tax,must make a return or statement accord-ing to the forms and regulations pre-scribed by the Secretary.

.02 Certain Payments Reported onForms 1042-S. Payments under theCode sections described in this para-graph are reported on Forms 1042-S.Section 1441(a) generally provides thatpersons having the control, receipt, cus-tody, disposal, or payment of items ofgross income specified in § 1441(b)from sources within the United States ofany nonresident alien individual or for-eign partnership must deduct and with-hold a tax equal to either 30 percent or14 percent of those amounts. Section1442 provides that, in the case of cer-tain foreign corporations, a tax equal to30 percent shall be deducted and with-held in the same manner and on thesame items of income as provided in §1441. Section 1443(a) provides that, inthe case of certain foreign tax-exemptorganizations, a tax equal to 30 percentof the amount of the unrelated businesstaxable income shall be deducted andwithheld in the same manner as pro-vided in § 1441. Section 1443(b) pro-vides that, in the case of certain foreigntax-exempt organizations, a tax on grossinvestment income derived fromsources within the United States equalto 4 percent of such amount shall be de-ducted and withheld in the same manneras provided in § 1441(a) or § 1442(a).Persons required to deduct and withholdtaxes under § 1441, 1442, or 1443 gen-erally must file Forms 1042-S reportingaggregate amounts for the calendaryear, as provided in the Income TaxRegulations under § 1461.

.03 Payments Reported on Forms1098. Payments and receipts under thefollowing Code sections are reported onforms in the series 1098: §§ 6050H (re-turns relating to mortgage interest re-ceived in trade or business from indi-viduals); and 6050S (returns relating tohigher education tuition and related ex-penses).

.04 Payments Reported on Forms1099. (1) In general. Payments underthe following Code sections are re-

ported on forms in the series 1099: §§220(h) (medical savings accounts);408(i) (individual retirement arrange-ments); 529(d) (qualified state tuitionprograms); 530(h) (education individualretirement accounts); 6041 (informationat source); 6041A (returns regardingpayments of remuneration for servicesand direct sales); 6042 (returns regard-ing payments of dividends and corpo-rate earnings and profits); 6043 (liqui-dating, etc., transactions); 6044 (returnsregarding payments of patronage divi-dends); 6045 (returns of brokers); 6047(information relating to certain trustsand annuity plans); 6049 (returns re-garding payments of interest); 6050A(reporting requirements of certain fish-ing boat operators); 6050B (returns re-lating to unemployment compensation);6050D (returns relating to energy grantsand financing); 6050E (state and localincome tax refunds); 6050J (returns re-lating to foreclosures and abandon-ments of security); 6050N (returns re-garding payments of royalties); 6050P(returns relating to the cancellation ofindebtedness by certain entities); 6050Q(certain long-term care benefits); and6050R (returns relating to certain pur-chases of fish).

(2) Persons Made Liable forBackup Withholding. Section 3406 pro-vides that payors of reportable pay-ments (as defined in § 3406(b)) must, incertain circumstances, deduct and with-hold a tax equal to 31 percent of thepayment (“backup withholding”).Under § 3406(b), reportable paymentsgenerally are payments required to beshown on a return under §§ 6041 (relat-ing to certain information at source),6041A(a) (relating to payments of re-muneration for services), 6042(a) (relat-ing to payments of dividends), 6044 (re-lating to patronage dividends), 6045(relating to returns of brokers), 6049(a)(relat ing to payments of interest),6050A (relating to reporting require-ments of certain fishing boat operators),and 6050N (relating to payments of roy-alties).

(3) Persons Made Liable for With-holding on Pensions, Annuities, andOther Deferred Income.Section 3405provides that payors of pensions, annu-ities and certain other deferred incomemust, in certain circumstances, deduct

and withhold a tax: (1) on periodic pay-ments as defined in § 3405(e)(2), anamount that would be required to bewithheld from such payment if suchpayment were a payment of wages; (2)on nonperiodic distributions as definedin § 3405(e)(3), 10 percent of the distri-bution; and (3) on eligible rollover dis-tributions as defined in § 3405(c)(3), 20percent of the distribution. Generally,the persons required to deduct and with-hold taxes under § 3405 must file Forms1099 reporting payments and distribu-tions, as provided under § 35.3405–1 ofthe Temporary Employment Tax Regu-lations and § 31.3405(c)–1 of the Em-ployment Tax Regulations.

.05 Contr ibut ions Reported onForms 5498. Contributions under thefollowing Code sections are reported onforms in the series 5498: §§ 138(medicare+choice MSA); 220 (medicalsavings accounts); 408(a) (individualretirement account); 408(b) (individualretirement annuity); 408(k) (simplifiedemployee pension); 408(p) (simple re-tirement account); 408A (Roth IRA);and 530 (education individual retire-ment account).

.06 Payments Reported on Forms W-2G. (1) In general. Section 7.6041–1 ofthe Temporary Income Tax Regulationsprovides that payments of winnings of$1,200 or more from a bingo game orslot machine play, and payments of win-nings of $1,500 or more from a kenogame, are reportable on Forms W-2G.Section 31.3406(g)–2(d) generally pro-vides that under § 3406 a reportablegambling winning is any gambling win-ning subject to information reportingunder § 6041. In addition, a gamblingwinning (other than a winning frombingo, keno, or slot machines) is a re-portable gambling winning only if theamount paid with respect to the wager is$600 or more and if the proceeds are atleast 300 times as large as the amountwagered.

(2) Extension of Withholding to Cer-tain Gambling Winnings. Section3402(q) provides that every personmaking a payment of winnings that aresubject to withholding (defined in §§3402(q)(3) and 31.3402(q)–1) shalldeduct and withhold a tax in an amountequal to 28 percent of such payment.

1999–52 I.R.B. 759 December 27, 1999

SECTION 3. SCOPE

This revenue procedure applies onlywhen all of the following conditions aremet:

(1) One business entity (i.e., a cor-poration, partnership, or sole proprietor-ship) (the “successor”) acquires from an-other business entity (the “predecessor”)substantially all the property (a) used inthe trade or business of the predecessor(including when two or more corporationsare parties to a merger agreement underwhich the surviving corporation becomesthe owner of all the assets and assumes allthe liabilities of the absorbed corpora-tion(s)), or (b) used in a separate unit of atrade or business of the predecessor;

(2) During the pre-acquisition por-tion of the “acquisition year” (the calen-dar year in which the acquisition occurs),the predecessor is required to file infor-mation returns as a result of making or re-ceiving payments, or withholding or col-lecting taxes, as provided under theappropriate sections of the Code and reg-ulations set forth above;

(3) During the post-acquisition por-tion of the acquisition year, the predeces-sor (for an acquisition described in sec-tion 3(1)(a)) or the separate unit of thepredecessor (for an acquisition describedin section 3(1)(b)) does not make or re-ceive any such payments and does notwithhold or collect any such tax;

(4) The requirements of section 5 ofthis revenue procedure are met; and

(5) The Internal Revenue Service in-structions or publications relating toForms 1042–S, a specific form in the se-ries 1098, 1099, or 5498, or Forms W-2Gdo not prohibit use of the alternative pro-cedure described in section 5.

SECTION 4. STANDARDPROCEDURE

Each person that makes or receivespayments, or withholds or collects taxes,that are reportable on Forms 1042-S,forms in the series 1098, 1099, and 5498,or Forms W-2G, is responsible for infor-mation reporting of those transactions.Thus, unless the alternative procedure ofsection 5 of this revenue procedure isused, both the predecessor and the succes-sor must file certain Forms 1042-S, formsin the series 1098, 1099, and 5498, orForms W-2G for reportable transactions

occurring in the acquisition year.

SECTION 5. ALTERNATIVEPROCEDURE

.01 The predecessor and the successormust agree that the successor assumes thepredecessor’s entire information reportingobligations for those Forms 1042-S (asdescribed in section 2.02 of this revenueprocedure), forms in the series 1098,1099, and 5498, and Forms W-2G towhich their agreement applies. The pre-decessor is relieved of its information re-porting obligations for reportable transac-tions occurring in the acquisition yearonly if and to the extent that their agree-ment meets, and the successor satisfies,each of the requirements of section 5 ofthis revenue procedure.

.02 The predecessor and successormust agree upon the specific Forms 1042-S, forms in the series 1098, 1099, and5498, and Forms W-2G to which this al-ternative procedure applies. The prede-cessor and successor may agree to (a) usethe alternative procedure for all Forms1042-S, forms in the series 1098, 1099, or5498, or Forms W-2G; or (b) limit theuse of the alternative procedure to (1) spe-cific Forms 1042-S, forms in the series1098, 1099, or 5498, or Forms W-2G; or(2) specific reporting entities (i.e., anyunit, branch or location within a particularbusiness entity that files its own separateinformation returns). For example, if theonly compatible computer or record keep-ing systems of a predecessor and succes-sor are their dividends paid ledgers, theymay use the alternative procedure forForms 1099-DIV, and use the standardprocedure for Forms 1042-S and all otherforms in the series 1098 or 1099. Simi-larly, if the only compatible computer orrecord keeping systems of a predecessorand successor are in their branches lo-cated in the Midwest, they may use the al-ternative procedure with respect to therecords maintained at those locations, anduse the standard procedure with respect tothe records maintained at all other loca-tions. The sharing between the predeces-sor and successor of taxpayer identifica-tion numbers and other informationobtained under § 3406 for information re-porting and backup withholding purposes,for the sole purpose of complying withthis revenue procedure, does not violate

the confidentiality rules contained in §3406(f).

.03 On each “appropriate form” (i.e.,each form to which the agreement in sec-tion 5 of this revenue procedure applies),the successor must combine (1) the pay-ments made or received on account of aperson by the predecessor in the pre-ac-quisition portion of the acquisition yearwith (2) the payments made or receivedon account of that person by the successorin that year, if any, and must report the ag-gregate amount(s) on account of that per-son for that year. In the case of amountsthat are required or permitted to be re-ported transactionally (for example, bro-ker sales of stock that are required to bereported on Forms 1099-B, ProceedsFrom Broker and Barter Exchange Trans-actions) the successor must report eachtransaction of the predecessor and each ofits transactions on each appropriate form.The successor may include with the formadditional information explaining to therecipient the combined reporting by thepredecessor and successor.

.04 On each appropriate form, the suc-cessor must also combine the amount ofany tax withheld under §§ 1441, 1442,1443, 3402(q), 3402(r), 3405, and3406(a) for a person by the predecessor inthe pre-acquisition portion of the acquisi-tion year with the amount withheld undersuch sections for that person by the suc-cessor in that year and, on the appropriateform(s), must report the aggregateamount for the year.

.05 The successor must file a state-ment with the Internal Revenue Serviceindicating that the appropriate forms arebeing filed on a combined basis in ac-cordance with the provisions of this rev-enue procedure. This statement isneeded to assist the Service in process-ing the forms filed under the alternativeprocedure. If tax has been withheld bythe predecessor pursuant to §§ 3402(q),3402(r), 3405, and 3406(a) during theacquisition year and reported by the pre-decessor on Form 945, Annual Return ofWithheld Federal Income Tax, the totalof the withholding amounts shown onthe successor’s Forms 1099 and W-2Gfor that year will exceed the total of thewithholding amounts shown on the suc-cessor’s Form 945. Therefore, the state-ment that must be filed with the Servicemust reflect the amount of any tax that

December 27, 1999 760 1999–52 I.R.B.

has been withheld by the predecessorand by the successor for each type ofform (for example, Forms 1099-R orForms 1099-MISC). Likewise, if anytax has been withheld under §§ 1441and 1442 during the acquisition year andreported on Form 1042, Annual With-holding Tax Return for U.S. Source In-come of Foreign Persons, the total of thewithholding amounts shown on the suc-cessor’s Forms 1042-S for that year willexceed the total of the withholdingamounts shown on the successor’s Form1042. Therefore, the statement thatmust be filed with the Service must re-flect the amount of tax that has beenwithheld by the predecessor and succes-sor for Form 1042-S.

.06 The statement required by section5.05 of this revenue procedure must in-clude the name, address, telephone num-ber, and Employer Identification Num-bers of both the successor andpredecessor, and the name and telephonenumber of the person responsible forpreparing this statement.

.07 The statement for Forms 1042-Smust be attached to the Form 1042 andmailed to the address for filing the Form1042 (appearing in the instructions to theform) on or before the date the Form 1042is due.

.08 The statement for forms in the se-ries 1098, 1099 and 5498, and Forms W-2G must be filed separately from suchforms and Form 945. Unless directedotherwise by the instructions to theforms, the statement for forms in the se-ries 1098, 1099, and 5498, and FormsW-2G must be mailed to the followingaddress on or before the date thoseforms are due:

Internal Revenue ServiceMartinsburg Computing Center230 Murall DriveAttention: Chief, Information Returns BranchMail Stop 360Kearneysville, WV 25430

SECTION 6. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 90–57, 1990–2 C.B. 641,and Rev. Rul. 69–556, 1969–2 C.B. 242,are modified and, as modified, are super-seded.

SECTION 7. EFFECTIVE DATE

This revenue procedure is effective forForms 1042-S, forms in the series 1098,1099, and 5498, and Forms W-2G filedafter December 31, 1999. In addition, if asuccessor filed forms on or before De-cember 31, 1999, in the circumstances de-scribed in section 3 of this revenue proce-dure, the predecessor’s filing obligationsare deemed to have been satisfied with re-spect to amounts shown on those forms ifthe predecessor and successor have sub-stantially complied with all the require-ments of section 5 of this revenue proce-dure (except for the statementrequirement of section 5.05).

SECTION 8. PAPERWORKREDUCTION ACT

The collections of information con-tained in this revenue procedure havebeen reviewed and approved by the Of-fice of Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545-1667. An agency may not conductor sponsor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid control number.

The collection of information is con-tained in section 5 of this revenue proce-dure which requires the filing of a state-ment that the alternative procedure hasbeen elected. This information is requiredto aid the Service in processing Forms1042-S, forms in the series 1098, 1099, and5498, and Forms W-2G filed by successorswho use the alternative procedure, recon-cile discrepancies between the amounts re-ported on Forms 945 and Forms 1099 andW-2G filed by both predecessors and suc-cessors who use the alternative procedure,and reconcile discrepancies between theamounts reported on Forms 1042-S andForms 1042 filed by predecessors and suc-cessors who use the alternative procedure.The likely respondents are business orother for-profit institutions.

The estimated average annual burdento prepare the statement is 5 minutes.The estimated number of respondents thatwill elect to use the alternate procedure is6,000 and the estimated total annual re-porting burden is 500 hours.

The estimated annual frequency of re-sponses is on occasion.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mater-ial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

DRAFTING INFORMATION

The principal author of this revenueprocedure is A. Katharine Jacob Kiss ofthe Office of Assistant Chief Counsel (In-come Tax and Accounting). For furtherinformation regarding this revenue proce-dure contact Ms. Kiss on (202) 622-4920(not a toll-free call).

26 CFR 601.201: Rulings and determination letters.(Also Part I, section 1361)

Rev. Proc. 99–51

SECTION 1. PURPOSE

This revenue procedure amplifiesRev. Proc. 99–3, 1999–1 I.R.B. 103,which sets forth areas of the InternalRevenue Code under the jurisdiction ofthe Associate Chief Counsel (Domestic)in which the Internal Revenue Servicewill not issue advance rulings or deter-mination letters.

SECTION 2. BACKGROUND

Section 301.7701–3 of the Procedureand Administrative Regulations allows aneligible entity to elect to be classified asan association taxable as a corporation forfederal tax purposes. Under §301.7701–3(a), an eligible entity is a busi-ness entity not classified as a corporationunder § 301.7701–2(b)(1), (3), (4), (5),(6), (7), or (8). A state law partnership isan eligible entity. Consequently, a statelaw limited partnership may elect to beclassified as an association taxable as acorporation for federal tax purposes.

Section 1362(a) of the Internal Rev-enue Code allows an eligible corporationto elect to be taxable as an S corporation.For a corporation to be eligible to electunder § 1362(a), the corporation must bea small business corporation. Section1361(b)(1)(D) requires that a small busi-ness corporation have no more than a sin-gle class of stock. A general partnership

1999–52 I.R.B. 761 December 27, 1999

interest includes rights and obligationsnot included in a limited partnership inter-est. If these obligations and rights resultin general and limited partnership inter-ests in a limited partnership having non-pro rata distribution rights, such interestsare different classes of stock for purposesof § 1361(b)(1)(D).

Given the factual difficulties involved indetermining whether the differences be-tween the rights and obligations of generaland limited partnership interests give rise toa second class of stock, the issue of whethera state law limited partnership complieswith the single class of stock requirement isunder extensive study. Accordingly, ad-vanced rulings will not be provided on theissue until the Service resolves it throughpublication of a revenue ruling, revenueprocedure, regulations, or otherwise.

SECTION 3. PROCEDURE

Rev Proc. 99–3 is amplified by addingthe following to section 5.01:

Section 1361. — Definition of a SmallBusiness Corporation. — Whether astate law limited partnership electingunder § 301.7701–3 to be classified as anassociation taxable as a corporation hasmore than one class of stock for purposesof § 1361(b)(1)(D). The Service will treatany request for a ruling on whether a statelaw limited partnership is eligible to electS corporation status as a request for a rul-ing on whether the partnership complieswith § 1361(b)(1)(D).

SECTION 4. EFFECTIVE DATE

This revenue procedure applies to allruling requests, including any pending inthe National Office and any submittedafter the date of this publication.

SECTION 5. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 99–3 is amplified.

SECTION 6. DRAFTINGINFORMATION

The principal author of this revenue pro-cedure is Richard Castanon of the Office ofAssistant Chief Counsel (Passthroughs andSpecial Industries). For further informationregarding this revenue procedure contactRichard Castanon at 202-622-3070 (not atoll free call).

Tax Avoidance UsingDistributions of EncumberedProperty

Notice 99–59

The Internal Revenue Service andTreasury Department have become awareof certain types of transactions, as de-scribed below, that are being marketed totaxpayers for the purpose of generatingtax losses. This notice is being issued toalert taxpayers and their representativesthat the purported losses arising fromsuch transactions are not properly allow-able for federal income tax purposes.

The transactions are cast in a variety offorms. In one typical arrangement, tax-payers act through a partnership to con-tribute cash to a foreign corporation,which has been formed for the purpose ofcarrying out the transaction, in exchangefor the common stock of that corporation.Another party contributes additional capi-tal to the corporation in exchange for thepreferred stock of that corporation. Theforeign corporation then acquires addi-tional capital by borrowing from a bankand grants the bank a security interest insecurities acquired by the foreign corpo-ration that have a value equal to theamount of the borrowing. Thereafter, theforeign corporation makes a distributionof the encumbered securities to the part-nership that holds its common stock. Theeffect of the distribution, combined withfees and other transaction costs incurredat the corporate level, is to reduce the re-maining value of the foreign corporation’scommon stock to zero or a minimalamount. Although the distributed securi-ties are encumbered by the bank debt (andthe taxpayers or their partnership may besecondarily liable for the debt as guaran-tors), the foreign corporation has suffi-cient other assets to repay the debt, and itis the understanding of all parties that theforeign corporation will repay the debtwith such other assets.

For example, if the taxpayers’ partner-ship had contributed $100x for the com-mon stock of the foreign corporation, thepartnership might receive a distribution ofsecurities with a fair market value of ap-proximately $100x, and that distributionwould have the economic effect of reduc-ing the remaining value of the foreign

corporation‘s common stock to zero.Nonetheless, because the distribution tothe partnership is subject to the bank debt,the parties take the position, pursuant to §301(b)(2) of the Internal Revenue Code,that the amount of the distribution is zerofor purposes of § 301. On that theory, nopart of the distribution is treated either asa dividend or as a reduction of stock basisunder § 301(c).

The partnership is treated as havingsubsequently disposed of the stock ofthe foreign corporation, giving rise to atax loss equal to the excess of the part-nership’s original basis in the stock($100x in the example) over the fairmarket value of the common stock afterthe distribution of securities (zero). Thedeemed disposition of the stock may bebased upon an election under §301.7701–3(c) of the regulations tochange the federal income tax classifica-tion of the foreign corporation from acorporation to a partnership, giving riseto a deemed liquidation of the foreigncorporation, or by treating the partner-ship as a trader in securities which electsunder § 475(f) to treat the securities thatit holds, including the stock of the for-eign corporation, as having been soldfor their fair market value on the lastbusiness day of the taxable year.

Thereafter, typically in a later taxableyear, the bank debt is repaid out of otherassets held by the foreign corporation.Although the parties previously treatedthe debt as reducing the amount of theearlier distribution from the foreign cor-poration, promoters advise taxpayers totake the position that the foreign corpora-tion’s repayment of the debt is not treatedas a distribution on its common stock.

A loss is allowable as a deduction forfederal income tax purposes only if it isbona fide and reflects actual economicconsequences. An artificial loss lackingeconomic substance is not allowable. SeeACM Partnership v. Commissioner, 157F.3d 231, 252 (3d Cir. 1998), cert. denied,119 S. Ct. 1251 (1999) (“Tax losses suchas these . . . which do not correspond toany actual economic losses, do not consti-tute the type of ‘bona fide’ losses that aredeductible under the Internal RevenueCode and regulations.”); Scully v. UnitedStates, 840 F.2d 478, 486 (7th Cir. 1988)(to be deductible, a loss must be a “gen-uine economic loss”); Shoenberg v. Com-

December 27, 1999 762 1999–52 I.R.B.

missioner, 77 F.2d 446, 448 (8th Cir.1935) (to be deductible, a loss must be“actual and real”); § 1.165–1(b) (“Only abona fide loss is allowable. Substanceand not mere form shall govern in deter-mining a deductible loss.”).

In the view of the Service and the Trea-sury Department, the arrangement de-scribed above (or any similar arrange-ment) does not produce an allowable loss.Through a series of contrived steps, tax-payers claim tax losses for capital outlaysthat they have in fact recovered. Such ar-tificial losses are not allowable for federalincome tax purposes.

The purported tax benefits from thesetransactions may also be subject to chal-lenge under other provisions of the Codeand regulations, including but not limitedto §§ 269, 301, 331, 446, 475, 482, 752,and 1001 of the Code.

Additionally, the Service may imposepenalties on participants in these transac-tions or, as applicable, on persons whoparticipate in the promotion or reportingof these transactions, including the accu-racy-related penalty under § 6662, the re-turn preparer penalty under § 6694, thepromoter penalty under § 6700, and theaiding and abetting penalty under § 6701.

The principal author of this notice isKen Cohen of the Office of AssistantChief Counsel (Corporate). For furtherinformation regarding this notice, con-tact Mr. Cohen on (202) 622-7790 (not

a toll-free call).

Information Reporting – RoyaltyPayments

Notice 99–60

Section 6050N(a)(1) requires thatevery person who makes payments ofroyalties (or similar amounts) aggregating$10 or more to any other person duringthe calendar year shall make a return ac-cording to the forms or regulations pre-scribed by the Secretary, setting forth theaggregate amount of such payments andthe name and address of the person towhom paid. Section 6050N(a)(2) im-poses this requirement on every personwho receives payments of royalties (orsimilar amounts) as a nominee and whomakes payments aggregating $10 or moreduring any calendar year to any other per-son with respect to the royalties (or simi-lar amounts) so received.

However, the reporting requirement of§ 6050N does not apply to payments ofroyalties that are not subject to incometax because the royalties are derived di-rectly by a noncompetent Indian from al-lotted and restricted land under the Gen-eral Allotment Act, 25 U.S.C. §§331–358, or from land held under acts ortreaties containing an exception provi-sion similar to the General Allotment

Act. SeeRev. Rul. 67–284, 1967–2 C.B.55, modified on another issue by Rev.Rul. 74–13, 1974–1 C.B. 14, and ampli-fied on another issue byRev. Rul. 94–16,1994–1 C.B. 19.

The principal author of this notice isEric Lucas of the Office of AssistantChief Counsel (Income Tax and Account-ing). For further information regardingthis notice contact Mr. Lucas at (202)622-4920 (not a toll-free call).

Weighted Average Interest RateUpdate

Notice 99-61

Notice 88-73 provides guidelines fordetermining the weighted average interestrate and the resulting permissible range ofinterest rates used to calculate current lia-bility for the purpose of the full fundinglimitation of § 412(c)(7) of the InternalRevenue Code as amended by the Om-nibus Budget Reconciliation Act of 1987and as further amended by the UruguayRound Agreements Act, Pub. L. 103-465(GATT).

The average yield on the 30-year Trea-sury Constant Maturities for November1999 is 6.15 percent.

The following rates were determinedfor the plan years beginning in the monthshown below.

90% to 105% 90% to 110%Weighted Permissible Permissible

Month Year Average Range Range

December 1999 6.00 5.40 to 6.30 5.40 to 6.60

Drafting Information

The principal author of Notice 99–61 isTodd Newman of Employee Plans, TaxExempt and Government Entities Divi-sion. For further information regardingthis notice, call the Employee Plans Actu-arial hotline, (202) 622-6076 between2:30 and 3:30 p.m. Eastern time (not atoll-free number). Mr. Newman’s numberis (202) 622-8458 (also not a toll-freenumber).

1999–52 I.R.B. 763 December 27, 1999

Foundations Status of CertainOrganizations

Announcement 99–115The following organizations have

failed to establish or have been unable tomaintain their status as public charitiesor as operating foundations. Accord-ingly, grantors and contributors may not,after this date, rely on previous rulingsor designations in the Cumulative Listof Organizations (Publication 78), or onthe presumption arising from the filingof notices under section 508(b) of theCode. This listing does not indicate thatthe organizations have lost their statusas organizations described in section501(c)(3), eligible to receive deductiblecontributions.

Former Public Charities.The followingorganizations (which have been treated asorganizations that are not private founda-tions described in section 509(a) of theCode) are now classified as private foun-dations:A & M Nutrition, Incorporated,

Winnsboro, LAAssist, Inc., Buffalo, NYChildren & Youth 2000, c/o Wolin &

Rosen, Chicago, ILColorado Collective for Medical

Decisions, Inc., Denver, COFriends of the Environment, Sacramento,

CAGlenville Community Festival

Foundation, Cleveland, OHImpact For Change Ministries

International, Inc. Waldorf, MDJersey Shore Public Relations &

Advertising Charitable ScholarshipTrust, Princeton, NJ

Lewis IDA Community DevelopmentCorp, Lowville, NY

Lo Society Branch of Wisconsin Inc,Oshkosh, WI

MPA Foundation, New York, NYNeighborhood Network Inc., Uniontown,

PASGV Property Management,

Los Angeles, CAVision Research Foundation Inc.,

Phoenix, AZVoters Organized to Educate, Compton,

CAWest Tennessee Young Farmers &

Homemakers LeadershipDevelopment, Columbia, TN

White Collar Crime, Inc., Roseland, NJWorking With Women Transporting

Service, Inc., Los Angeles, CAIf an organization listed above submits

information that warrants the renewal of itsclassification as a public charity or as a pri-vate operating foundation, the Internal Rev-enue Service will issue a ruling or determi-nation letter with the revised classificationas to foundation status. Grantors and con-tributors may thereafter rely upon such rul-ing or determination letter as provided insection 1.509(a)–7 of the Income Tax Reg-ulations. It is not the practice of the Serviceto announce such revised classification offoundation status in the Internal RevenueBulletin.

Actions on Decisions; Correction

Announcement 99–116

This document corrects the Actions onDecisions published in 1999–35 I.R.B.314. All 7 footnotes describing the “Ac-quiescence” or “Nonacquiesence” in eachdecision included the words “in result

only,” which were erroneous. The courtcases are listed below, followed by thefootnotes with the correct text.

The Commisioner ACQUIESCES inthe following decisions:

Internal Revenue Service v. Wald-schmidt (In re Bradley),1

(M.D. Tenn 1999)Estate of Mellinger v. Commisioner,2

112 T.C. 4 (1999)Hospital Corp. of America and Sub-sidiaries v. Commissioner,3

109 T.C. 21 (1997)Boyd Gaming Corporation v. Com-missioner,4

F.3d (9th Cir. 1999)

The Commissioner NONACQUI-ESCES in the following decisions:

Vulcan Materials Company and Sub-sidiaries v. Commissioner,5

96 T.C. 410 (1991)St. Jude Medical, Inc. v. Commis-sioner,6

34 F.3d 1394 (8th Cir. 1994)Hospital Corp. of America and Sub-sidiaries v. Commissioner,7

109 T.C. 21 (1997)

Social Security Contribution andBenefit Base for 2000

Under authority contained in theSocial Security Act (“the Act”), theCommissioner, Social SecurityAdministration, has determined andannounced (64 F.R. 57506, datedOctober 25, 1999) that the contributionand benefit base for remuneration paidin 1999, and self-employment incomeearned in taxable years beginning in2000 is $76,200.

Part IV. Items of General Interest

1Acquiescence relating to whether gain on the sale ofthe debtor’s residence is excluded from gross incomeof the bankruptcy estate to the extent provided byI.R.C. §121 and in accord with section 1398.2Acquiescence relating to whether, for estate tax valu-ation purposes, a minority interest in a closely heldcorporation held in a Qualified Terminable InterestProperty (QTIP) trust, which is includible in the grossestate under I.R.C. §2044, is aggregated with a minor-ity interest in the same corporation that is includible ina decedent’s gross estate under other provisions of theCode.3Acquiescence relating to whether the tests developedunder the investment tax credit (ITC) prior to the 1981

adoption of the cost recovery system are applicable indetermining a structural component for the purposes ofAccelerated Cost Recovery System (ACRS) andModified Accelerated Cost Recovery System(MACRS).4Acquiescence relating to whether a meal furnished bythe taxpayer/employer on its business premises to anemployee is furnished for “the convenience of theemployer” within the meaning of that phrase in section119 of the Internal Revenue Code.5Nonacquiescence relating to whether the term “accu-mulated profits” as used in the denominator of the sec-tion 902 deemed paid credit fraction before the TaxReform Act of 1986 means all of a foreign corpora-tion’s accumulated profits for the taxable year. This

revised action on decision clarifies the Service’s posi-tion on this issue in cases appealable to the 11thCircuit.6Nonacquiescence relating to whether section1.861–8(e)(3) of the Income Tax Regulations is invalidas applied to DISC combined taxable income (CTI)calculations.7Nonacquiescence relating to whether certain itemstreated as tangible personal property and depreciatedover a 5-year recovery period were in fact structuralcomponents of the buildings to which they relatewhich must be depreciated over the same recoveryperiod as the buildings, pursuant to I.R.C. §168.

“Old-Law” Contribution and Benefit Base

General

The “old-law” contribution and benefitbase for 2000 is $56,700. This is the basethat would have been effective under theAct without the enactment of the 1977amendments. The base is computed undersection 230(b) of the Act as it read prior tothe 1977 amendments.

The “old-law” contribution and benefitbase is used by:

(a) The Railroad Retirement program todetermine certain tax liabilities and tier IIbenefits payable under that program tosupplement the tier I payments which cor-respond to basic Social Security benefits,

(b) The Pension Benefit GuarantyCorporation to determine the maximumamount of pension guaranteed under theEmployee Retirement Income SecurityAct (as stated in section 230(d) of theSocial Security Act),

(c) Social Security to determine a yearof coverage in computing the special min-

imum benefit, as described earlier, and(d) Social Security to determine a year

of coverage (acquired whenever earningsequal or exceed 25 percent of the “old-law” base for this purpose only) in com-puting benefits for persons who are alsoeligible to receive pensions based onemployment not covered under section210 of the Act.

Domestic Employee CoverageThreshold

General

Section 2 of the “Social SecurityDomestic Employment Reform Act of1994” (Pub. L. 103-387) increased thethreshold for coverage of a domesticemployee’s wages paid per employerfrom $50 per calendar quarter to $1,000per annum in calendar year 1994. Thestatute held the coverage threshold at the$1,000 level for 1995 and then increasedthe threshold in $100 increments for yearsafter 1995. Section 3121(x) of the InternalRevenue Code provides the formula forincreasing the threshold.

Computation

Under the formula, the domesticemployee coverage threshold amount for2000 shall be equal to the 1995 amount of$1,000 multiplied by the ratio of thenational average wage index for 1998 tothat for 1993. If the amount so determinedis not a multiple of $100, it shall be round-ed to the next lower multiple of $100.

Domestic Employee Coverage ThresholdAmount

The ratio of the national average wageindex for 1998, $28,861.44, compared tothat for 1993, $23,132.67, is 1.2476485.Multiplying the 1995 domestic employeecoverage threshold amount of $1,000 by theratio of 1.2476485 produces the amount of$1,247.65, which must then be rounded to$1,200. Accordingly, the domestic employ-ee coverage threshold amount is deter-mined to be $1,200 for 2000.

(Filed by the Office of the Federal Regis-ter on October 22, 1999, 8:45 a.m., andpublished in the issue of the Federal Reg-ister for October 25, 1999, 64 F.R. 57506)

December 27, 1999 764 1999–52 I.R.B.

December 27, 1999 i 1999–52 I.R.B.

Revenue rulings and revenue procedures(hereinafter referred to as “rulings”)that have an effect on previous rulingsuse the following defined terms to de-scribe the effect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus,if an earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguisheddescribes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it ap-

plies to both A and B, the prior ruling ismodified because it corrects a publishedposition. (Compare with amplified andclarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this casethe previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling andthat list is expanded by adding furthernames in subsequent rulings. After theoriginal ruling has been supplementedseveral times, a new ruling may be pub-lished that includes the list in the originalruling and the additions, and supersedesall prior rulings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current use and for-merly used will appear in material published in theBulletin.

A—Individual.

Acq.—Acquiescence.

B—Individual.

BE—Beneficiary.

BK—Bank.

B.T.A.—Board of Tax Appeals.

C.—Individual.

C.B.—Cumulative Bulletin.

CFR—Code of Federal Regulations.

CI—City.

COOP—Cooperative.

Ct.D.—Court Decision.

CY—County.

D—Decedent.

DC—Dummy Corporation.

DE—Donee.

Del. Order—Delegation Order.

DISC—Domestic International Sales Corporation.

DR—Donor.

E—Estate.

EE—Employee.

E.O.—Executive Order.

ER—Employer.

ERISA—Employee Retirement Income Security Act.

EX—Executor.

F—Fiduciary.

FC—Foreign Country.

FICA—Federal Insurance Contribution Act.

FISC—Foreign International Sales Company.

FPH—Foreign Personal Holding Company.

F.R.—Federal Register.

FUTA—Federal Unemployment Tax Act.

FX—Foreign Corporation.

G.C.M.—Chief Counsel’s Memorandum.

GE—Grantee.

GP—General Partner.

GR—Grantor.

IC—Insurance Company.

I.R.B.—Internal Revenue Bulletin.

LE—Lessee.

LP—Limited Partner.

LR—Lessor.

M—Minor.

Nonacq.—Nonacquiescence.

O—Organization.

P—Parent Corporation.

PHC—Personal Holding Company.

PO—Possession of the U.S.

PR—Partner.

PRS—Partnership.

PTE—Prohibited Transaction Exemption.

Pub. L.—Public Law.

REIT—Real Estate Investment Trust.

Rev. Proc.—Revenue Procedure.

Rev. Rul.—Revenue Ruling.

S—Subsidiary.

S.P.R.—Statements of Procedral Rules.

Stat.—Statutes at Large.

T—Target Corporation.

T.C.—Tax Court.

T.D.—Treasury Decision.

TFE—Transferee.

TFR—Transferor.

T.I.R.—Technical Information Release.

TP—Taxpayer.

TR—Trust.

TT—Trustee.

U.S.C.—United States Code.

X—Corporation.

Y—Corporation.

Z—Corporation.

Definition of Terms

December 27, 1999 ii 1999–52 I.R.B.

Numerical Finding List1

Bulletins 1999–27 through 1999–51

Announcements:

99–47, 1999–28 I.R.B. 2999–64, 1999–27 I.R.B.799–65, 1999–27 I.R.B. 999–66, 1999–27 I.R.B. 999–67, 1999–28 I.R.B. 3199–68, 1999–28 I.R.B. 3199–69, 1999–28 I.R.B. 3399–70, 1999–29 I.R.B. 11899–71, 1999–31 I.R.B. 22399–72, 1999–30 I.R.B. 13299–73, 1999–30 I.R.B. 13399–74, 1999–30 I.R.B. 13399–75, 1999–30 I.R.B. 13499–76, 1999–31 I.R.B. 22399–77, 1999–32 I.R.B. 24399–78, 1999–31 I.R.B. 22999–79, 1999–31 I.R.B. 22999–80, 1999–34 I.R.B. 31099–81, 1999–32 I.R.B. 24499–82, 1999–32 I.R.B. 24499–83, 1999–32 I.R.B. 24599–84, 1999–33 I.R.B. 24899–85, 1999–33 I.R.B. 24899–86, 1999–35 I.R.B. 33299–87, 1999–35 I.R.B. 33399–88, 1999–36 I.R.B. 40799–89, 1999–36 I.R.B. 40899–90, 1999–36 I.R.B. 40999–91, 1999–37 I.R.B. 42199–92, 1999–38 I.R.B. 43399–93, 1999–36 I.R.B. 40999–94, 1999–39 I.R.B. 43799–95, 1999–42 I.R.B. 52099–96, 1999–41 I.R.B. 50499–97, 1999–41 I.R.B.50599–98, 1999–42 I.R.B. 52099–99, 1999–42 I.R.B. 52299–100, 1999–42 I.R.B. 52299–101, 1999–43 I.R.B. 54499–102, 1999–43 I.R.B. 54599–103, 1999–43 I.R.B. 54699–104, 1999–44 I.R.B. 55599–105, 1999–44 I.R.B. 55599–106, 1999–45 I.R.B. 56199–107, 1999–45 I.R.B. 56199–108, 1999–46 I.R.B. 57399–109, 1999–46 I.R.B. 57399–110, 1999–46 I.R.B. 57499–111, 1999–47 I.R.B. 58799–112, 1999–49 I.R.B. 64999–113, 1999–50 I.R.B. 67399–114, 1999–50 I.R.B. 674

Notices:

99–34, 1999–35 I.R.B. 32399–35, 1999–28 I.R.B.2699–37, 1999–30 I.R.B. 12499–38, 1999–31 I.R.B. 13899–39, 1999–34 I.R.B.31399–40, 1999–35 I.R.B. 32499–41, 1999–35 I.R.B. 32599–42, 1999–35 I.R.B. 32599–43, 1999–36 I.R.B. 34499–44, 1999–35 I.R.B. 326

Notices—Continued

99–45, 1999–37 I.R.B. 41599–46, 1999–37 I.R.B. 41599–47, 1999–36 I.R.B. 39199–48, 1999–38 I.R.B. 42999–49, 1999–39 I.R.B. 43699–50, 1999–40 I.R.B. 44499–51, 1999–40 I.R.B. 44799–52, 1999–43 I.R.B. 52599–53, 1999–46 I.R.B.56599–54, 1999–47 I.R.B.57999–55, 1999–49 I.R.B. 63899–56, 1999–50 I.R.B.66899–57, 1999–51 I.R.B. 69399–58, 1999–51 I.R.B. 694

Proposed Regulations:

REG–252487–96, 1999–34 I.R.B. 303REG–101519–97, 1999–29 I.R.B. 114REG–107069–97, 1999–36 I.R.B. 346REG–110385–99, 1999–50 I.R.B. 670REG–121063–97, 1999–43 I.R.B. 540REG–106010–98, 1999–40 I.R.B. 493REG–106527–98, 1999–34 I.R.B. 304REG–108287–98, 1999–28 I.R.B.27REG–113526–98, 1999–37 I.R.B. 417REG–113909–98, 1999–30 I.R.B. 125REG–116733–98, 1999–36 I.R.B. 392REG–116991–98, 1999–32 I.R.B. 242REG–121946–98, 1999–36 I.R.B. 403REG–103841–99, 1999–49 I.R.B. 639REG–104939–99, 1999–49 I.R.B. 643REG–105237–99, 1999–35 I.R.B. 331REG–105327–99, 1999–29 I.R.B. 117REG–105565–99, 1999–37 I.R.B. 419REG–115932–99, 1999–47 I.R.B. 583REG–116125–99, 1999–44 I.R.B. 552

Railroad Retirement Quarterly Rate:

1999–45 I.R.B. 5601999–46 I.R.B.563

Revenue Procedures:

99–28, 1999–29 I.R.B.10999–29, 1999–31 I.R.B. 13899–30, 1999–31 I.R.B. 22199–31, 1999–34 I.R.B. 28099–32, 1999–34 I.R.B. 29699–33, 1999–34 I.R.B. 30199–34, 1999–40 I.R.B. 45099–35, 1999–41 I.R.B. 50199–36, 1999–42 I.R.B. 50999–37, 1999–42 I.R.B. 51799–38, 1999–43 I.R.B. 52599–39, 1999–43 I.R.B. 53299–40, 1999–46 I.R.B. 56599–41, 1999–46 I.R.B. 56699–42, 1999–46 I.R.B. 56899–43, 1999–47 I.R.B.57999–44, 1999–48 I.R.B.59899–45, 1999–49 I.R.B.60399–46, 1999–49 I.R.B.60599–47, 1999–48 I.R.B.624

Revenue Rulings:

99–29, 1999–27 I.R.B.399–30, 1999–28 I.R.B. 2499–31, 1999–37 I.R.B. 410

Revenue Rulings—Continued

99–32, 1999–31 I.R.B. 13599–33, 1999–34 I.R.B. 25199–34, 1999–33 I.R.B. 24799–35, 1999–34 I.R.B. 27899–36, 1999–35 I.R.B. 31999–37, 1999–36 I.R.B. 33699–38, 1999–36 I.R.B. 33599–39, 1999–38 I.R.B. 42499–40, 1999–40 I.R.B. 44199–41, 1999–40 I.R.B. 43999–42, 1999–41 I.R.B. 49799–43, 1999–42 I.R.B. 50699–44, 1999–44 I.R.B. 54999–45, 1999–45 I.R.B. 55899–46, 1999–45 I.R.B. 55799–47, 1999–48 I.R.B.58899–48, 1999–49 I.R.B.60099–49, 1999–50 I.R.B. 66799–50, 1999–50 I.R.B. 65699–51, 1999–50 I.R.B. 65299–52, 1999–50 I.R.B. 65299–53, 1999–50 I.R.B. 65799–54, 1999–51 I.R.B. 67599–55, 1999–51 I.R.B. 67599–56, 1999–51 I.R.B. 67699–57, 1999–51 I.R.B. 678

Treasury Decisions:

8822, 1999–27 I.R.B.58823, 1999–29 I.R.B. 348824, 1999–29 I.R.B. 628825, 1999–28 I.R.B. 198826, 1999–29 I.R.B. 1078827, 1999–30 I.R.B.1208828, 1999–30 I.R.B.1208829, 1999–32 I.R.B.2358830, 1999–38 I.R.B. 4308831, 1999–34 I.R.B.2648832, 1999–35 I.R.B. 3158833, 1999–36 I.R.B. 3388834, 1999–34 I.R.B.2518835, 1999–35 I.R.B.3178836, 1999–37 I.R.B. 4118837, 1999–38 I.R.B. 4268838, 1999–38 I.R.B. 4248839, 1999–41 I.R.B. 4988840, 1999–47 I.R.B. 5758841, 1999–48 I.R.B. 5938842, 1999–47 I.R.B. 5768843, 1999–48 I.R.B. 5908844, 1999–50 I.R.B.6618845, 1999–51 I.R.B.6848846, 1999–51 I.R.B.679

1 A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., published inInternal Revenue Bulletins 1999–1 through 1999–26is in Internal Revenue Bulletin 1999–27, dated July6, 1999.

1999–52 I.R.B. iii December 27, 1999

Finding List of Current Action onPreviously Published Items1

Bulletins 1999–27 through 1999–51

Announcements:

99–5Modified by Ann. 99–106, 1999–45 I.R.B. 561

99–57Modified by Ann. 99–104, 1999–44 I.R.B. 555

99–59Corrected by Ann. 99–67, 1999–28 I.R.B. 31

Notices:

83–10Modified by Notice 99–44, 1999–35 I.R.B. 326

96–64

Modified by Notice 99–40, 1999–35 I.R.B. 324

97–26Modified by Notice 99–41, 1999–35 I.R.B. 325

97–50Modified and superseded by Notice 99–41, 1999–35 I.R.B. 325

97–73Modified by Notice 99–37, 1999–30 I.R.B. 124

98–7Modified by Notice 99–37, 1999–30 I.R.B. 124

98–46Modified by Notice 99–37, 1999–30 I.R.B. 124

98–47Modified and superseded by Notice 99–41, 1999–35 I.R.B. 325

98–54Modified by Notice 99–37, 1999–30 I.R.B. 124

98–59Modified by Notice 99–37, 1999–30 I.R.B. 124

Proposed Regulations:

REG–208156–91Corrected by Ann. 99–65, 1999–27 I.R.B. 9

Revenue Procedures:

65–17Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

65–31Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

70–23Superseded by

Rev. Proc. 99–32, 1999–34 I.R.B. 296

Revenue Procedures—Continued

71–35Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

72–22Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

72–46Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

72–48Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

72–53Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

89–48Obsoleted (after Jan. 31, 2000) by Notice 99–42, 1999–35 I.R.B. 325

89–49Obsoleted (after Jan. 31, 2000) by Notice 99–42, 1999–35 I.R.B. 325

96–9Superseded by Rev. Proc. 99–28, 1999–29 I.R.B. 109

96–17Modified by Rev. Proc. 99–39, 1999–43 I.R.B. 532

96–47Amplified and superseded by Rev. Proc. 99–40, 1999–46 I.R.B. 565

97–19Modified by Notice 99–41, 1999–35 I.R.B. 325

97–47Amplified, clarified, modified, and superseded by Rev. Proc. 99–39, 1999–43 I.R.B. 532

98–10Modified by Rev. Proc. 99–45, 1999–49 I.R.B. 603

98–22Clarified and supplemented by Rev. Proc. 99–31, 1999–34 I.R.B. 280

98–35Superseded byRev. Proc. 99–29, 1999–31 I.R.B. 138

98–37Superseded byRev. Proc. 99–34, 1999–40 I.R.B. 450

98–63Modified by Ann. 99–7 and superseded byRev. Proc. 99–38, 1999–43 I.R.B. 525

99–19Modified and superseded byRev. Proc. 99–43, 1999–47 I.R.B. 579

99–29Corrected byAnn. 99–112, 1999–49 I.R.B. 649

Revenue Rulings:

66–9Revoked byRev. Rul. 99–56, 1999–51 I.R.B. 676

66–223Obsoleted byT.D. 8846, 1999–51 I.R.B. 679

73–51Revoked byRev. Rul. 99–56, 1999–51 I.R.B. 676

73–98Obsoleted byT.D. 8846, 1999–51 I.R.B. 679

77–475Modified and superseded byRev. Rul. 99–40, 1999–40 I.R.B. 441

80–159Obsoleted by T.D. 8846, 1999–51 I.R.B. 679

82–80Superseded by Rev. Proc. 99–32, 1999–34 I.R.B. 296

84–58Modified and superseded byRev. Rul. 99–40, 1999–40 I.R.B. 441

88–98Modified and superseded by Rev. Rul. 99–40, 1999–40 I.R.B. 441

88–225Modified by Rev. Rul. 99–44, 1999–48 I.R.B. 598

93–48Obsoleted byT.D. 8846, 1999–51 I.R.B. 679

98–58Supplemented and superseded byRev. Rul. 99–50, 1999–50 I.R.B. 656

98–59Supplemented and superseded by Rev. Rul. 99–49, 1999–50 I.R.B. 667

99–23Corrected byAnn. 99–89, 1999–36 I.R.B. 408

Treasury Decisions:

8476Corrected byAnn. 99–74, 1999–30 I.R.B. 133

8742Corrected byAnn. 99–73, 1999–30 I.R.B. 133

8793Corrected byAnn. 99–75, 1999–30 I.R.B. 134

8805Corrected byAnn. 99–66, 1999–27 I.R.B. 9

8806Corrected byAnn. 99–84, 1999–33 I.R.B. 248

1 A cumulative finding list of actions published inInternal Revenue Bulletins 1999–1 through 1999–26is in Internal Revenue Bulletin 1999–27, dated July6, 1999.

insert pictures

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