IRS ISSUES PROCEDURES FOR CHANGING METHOD OF ACCOUNTING FOR NOTIONAL PRINCIPAL CONTRACTS.

Rev. Proc. 93-48

SECTION 1. PURPOSE

This revenue procedure provides the exclusive procedures for taxpayers described in section 3.01 of this revenue procedure that are required by section 1.446-3 of the Income Tax Regulations to change their method of accounting for notional principal contracts entered into after December 12, 1993. Under this revenue procedure, qualifying taxpayers may obtain the expeditious consent of the Commissioner, under section 446(e) of the Internal Revenue Code, to change their method of accounting. This revenue procedure also provides that any method of accounting for notional principal contracts that is inconsistent with section 1.446-3 is a Designated A method. Any taxpayer not within the scope of this revenue procedure that desires to change its method of accounting for notional principal contracts should see section 1.446-1(e)(3) and Rev. Proc. 92-20, 1992-1 C.B. 685, for further guidance.

SEC. 2. BACKGROUND

.01 Notice 89-21, 1989-1 C.B. 651, required taxpayers to account for lump-sum payments under notional principal contracts over the term of the notional principal contract. Section 1.446-3 prescribes final rules for the timing of income and deductions from notional principal contracts, effective for notional principal contracts entered into after December 12, 1993.

.02 Taxpayers currently reporting income and deductions from notional principal contracts in a manner inconsistent with section 1.446-3 are required to change their method of accounting for notional principal contracts entered into after December 12, 1993.

.03 Section 446(e) provides generally that a taxpayer must secure the consent of the Secretary in order to change a method of accounting for federal income tax purposes. Section 1.446-1(e)(3)(i) states that, except as otherwise provided, a taxpayer must request this consent by filing Form 3115 (Application for Change in Accounting Method) within 180 days after the beginning of the taxable year for which the proposed change is to be made. Section 1.446- 1(e)(3)(ii) authorizes administrative procedures setting forth the limitations, terms, and conditions under which the Commissioner may consent to a change in method of accounting in accordance with section 446(e).

.04 Section 2.04 of Rev. Proc. 92-20 indicates that, unless other published guidance provides terms and conditions that must be employed when making a specific type of accounting method change, a change in method of accounting is to be made pursuant to the terms and conditions provided in Rev. Proc. 92-20.

SEC. 3. SCOPE

.01 Except as provided in section 3.02 of this revenue procedure, this revenue procedure applies if:

(1) A taxpayer is changing its method of accounting for notional principal contracts;

(2) The change is necessary to comply with the requirements of section 1.446-3; and

(3) The year of change is the first taxable year ending after December 12, 1993.

.02 This revenue procedure does not apply to a taxpayer if, at the time Form 3115 is filed, the taxpayer is the subject of a criminal investigation or proceeding concerning (1) directly or indirectly, the taxpayer's federal tax liability for any year, or (2) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability for any year.

SEC. 4. PROCEDURES TO OBTAIN EXPEDITIOUS CONSENT

.01 A taxpayer desiring to change its method of accounting for notional principal contracts pursuant to this revenue procedure must:

(1) Prepare and file an original Form 3115 with its timely filed (including extensions) federal income tax return for its first taxable year ending after December 12, 1993;

(2) File a copy of the Form 3115 (no later than when the Form 3115 is filed with the federal income tax return) with the Commissioner of Internal Revenue, Attention: Office of the Assistant Chief Counsel (Income Tax and Accounting) CC:DOM:IT&A, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044; and

(3) Agree that it will comply with section 1.446-3 with respect to all notional principal contracts entered into after December 12, 1993, beginning with the year of change.

.02 The Form 3115 must include a signed written statement providing that the taxpayer agrees to all of the terms and conditions of this revenue procedure. The Form 3115 must be signed by or on behalf of the taxpayer requesting the change by an individual with the authority to bind the taxpayer in such matters. See the signature requirements in section 10.07 of Rev. Proc. 92-20 and the General Instructions for Form 3115. If the taxpayer is a member of a consolidated group, a Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. See section 10.08 of Rev. Proc. 92-20 and section 1.1502-77.

.03 To assist in the processing of the change in method of accounting, type or print legibly the following statement at the top of page 1 of Form 3115: "AUTOMATIC CHANGE FILED UNDER REV. PROC. 93- 48."

.04 No user fee is required for an application made under this revenue procedure.

SEC. 5. CONSENT TO CHANGE AND MANNER OF CHANGE

.01 In accordance with section 1.446-1(e)(3)(ii), the requirement to file an application on Form 3115 within the 180-day period is waived for a change in method of accounting under this revenue procedure.

.02 A taxpayer within the scope of this revenue procedure that requests a change in method of accounting under this revenue procedure is hereby granted the Commissioner's consent to make the change for the first taxable year ending after December 12, 1993, for notional principal contracts entered into after December 12, 1993, provided the taxpayer meets the terms and conditions of sections 4.01 and 4.02 of this revenue procedure.

.03 The method of accounting for notional principal contracts entered into before December 13, 1993, is not to be changed under this revenue procedure. Therefore, no section 481(a) adjustment is required.

SEC. 6. EFFECT OF NON-COMPLIANCE WITH CONDITIONS

If a taxpayer to which this revenue procedure applies changes its method of accounting for notional principal contracts to a method prescribed in section 1.446-3 without complying with all the terms and conditions of sections 4.01 and 4.02 of this revenue procedure, the taxpayer has initiated the change in method of accounting without obtaining the permission of the Commissioner as required by section 446(e).

SEC. 7. DEFINITIONS

The following terms have the meaning given to them by Rev. Proc. 92-20:

Category A method (See section 3.06 of Rev. Proc. 92-20);

Designated A method (See section 3.07 of Rev. Proc. 92-20);

Filed (See section 3.04 of Rev. Proc. 92-20);

Taxpayer (See section 3.01 of Rev. Proc. 92-20); and

Year of change (See section 3.03 of Rev. Proc. 92-20).

SEC. 8. DESIGNATION OF INCONSISTENT METHODS

Any method of accounting for notional principal contracts entered into after December 12, 1993, that is inconsistent with section 1.446-3 is a Category A method and is hereby designated under section 3.07 of Rev. Proc. 92-20. Accordingly, those inconsistent methods are Designated A methods.

SEC. 9. TREATMENT OF NOTIONAL PRINCIPAL CONTRACTS ENTERED INTO BEFORE DECEMBER 13, 1993

A taxpayer that receives consent to change its method of accounting under this revenue procedure does not thereby obtain audit protection with respect to notional principal contracts entered into before December 13, 1993. However, an examining agent will not propose a change in method for contracts entered into before December 13, 1993, if the taxpayer's method takes payments into account under a reasonable method. See, e.g., Notice 89-21 (amortization of lump- sum payments).

SEC. 10. EFFECTIVE DATE

This revenue procedure is effective on December 13, 1993.

DRAFTING INFORMATION

The principal author of this revenue procedure is Alan B. Munro of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure contact Alan B. Munro on (202) 622-3950 (not a toll-free call).