Rev. Proc. 65-5

SECTION 1. INTRODUCTION.

.01 Revenue Procedure 64-4, C.B. 1964-1 (Part 1), 644, provides guidelines relative to acceptable sampling procedure for complying with the rules under section 1.453-2(d) of the Income Tax Regulations covering sales of personal property under a revolving credit plan. Section 5 of that Revenue Procedure provides a standard sampling plan for taxpayers who did not elect to use the tailor-made plans permitted by section 3.021 or the 100-percent sample permitted by section 3.023.

.02 The following optional procedure is added to section 5 of Revenue Procedure 64-4, so that taxpayers who used that section in the preceding year would not have to list all of their accounts that are designated as revolving credit accounts as required by section 5.02 of Revenue Procedure 64-4. In addition, changes are being made in the number of accounts used in the selection procedure.

SEC. 2. OPTIONAL PROCEDURE.

.01 Brief description of alphabetic segment system. This section permits taxpayers who qualify to select a sample of alphabetic segments by following prescribed rules. After the alphabetic segment sample has been selected, accounts as defined in section 5.02 of Revenue Procedure 64-4 would be listed for only the selected alphabetic segments. The remainder of the sampling procedure will be similar to that prescribed in section 5 of Revenue Procedure 64-4.

.02 Taxpayers who use the alphabetic segment procedure should:

1 Have a copy of Exhibit 2 of Revenue Procedure 64-4 used for the prior year;

2 Have a complete listing of accounts for at least one prior year as prescribed by section 5.02 of Revenue Procedure 64-4;

3 Have revolving credit accounts essentially similar to those for the prior year. `Essentially similar' allows for normal change in volume or character. If, however, (a) the number of accounts is more than double or less than half those for the prior year, (b) the method of maintaining accounts is substantially different, or (c) the character of the business has changed markedly by merger, reorganization, or otherwise, then this method should not be used as part of the standard plan of section 5 of Revenue Procedure 64-4. This provision does not restrict a taxpayer who may wish to use an alphabetic segment sampling system as part of a tailormade plan under section 4 of Revenue Procedure 64-4.

.03 Number of alphabetic segments to be selected.

1 Determine the number of accounts in last year's sample by referring to line 12 and `Total of all subsamples' column of the previous year's Exhibit 2, `Percent Allocation of Revolving Credit Accounts.'

2 Determine the number of accounts in the frame for the prior year by reference to the same source as in step 1, above. This is the amount entered at the top of Exhibit 2 for the prior year between `Skip interval used' and `Date.' For subsequent years, this entry would be an estimate. See paragraph .083, below, for obtaining this estimate.

3 Divide the number of accounts determined in step 2 by the number obtained in step 1.

4 If the quotient of step 3 is greater than or equal to 66 2/3 , then the number of alphabetic segments required is 30.

5 If the quotient of step 3 is less than 66 2/3 , then divide 2,000 by the quotient of step 3 to obtain the number of alphabetic segments required. A fraction of an alphabetic segment should be raised to a whole number. For example, step 1 shows that 500 accounts were used for last year's sample. Step 2 shows that last year's frame contained 32,500 accounts. Step 3 is the computation 32,500 divided by 500 equals 65. From step 4, 65 is less than 66 2/3 ; therefore, more than 30 alphabetic segments will be needed. Step 5 yields 2,000 divided by 65 or 30.8 segments. Therefore, the number of segments required is 31.

.04 Use of Table 4, `List of 1,000 Alphabetic Segments To Be Used With Optional Procedure .'-Table 4 divides the alphabet into 1,000 parts. Thus, customers whose last names begin with A through Abe are in segment 1, for example, Aaron, Abbot, Abelson. Names beginning with Abf through Ac are in segment 2, for example, Abit, Abraham, Acadia, and Acrobat. Segment 3 starts with Ad and and continues up to but not including Adams. I. Thus, Adair, Adamco, Harry Adams are in segment 3 but Irving Adams is in segment 4. Note that only the beginning letters of each segment are shown; the end of each segment is determined by the beginning of the next segment.

.05 Use of Table 5, `Numbers 1 to 1,000 in Random Order .'

1 Table 5 contains 10 double columns each headed by a `Sum of digits' from 0 through 9. The column to be used is determined by the same rule as that used for section 5.045 of Revenue Procedure 64-4, namely:

Add the last digit of the Taxpayer Identifying Number, as shown on the income tax return, to the last digit of the year in which the taxpayer's fiscal or calendar year ends. If the sum is 9 or less, use the `Sum of digits' column so indicated. If the sum of digits is greater than 9, substract 10 from the sum and use the column indicated by the remainder. For example, if the taxpayer identifying number is 3-456695 and the taxpayer's fiscal year ends January 31, 1965, column `o' is used (5 plus 5 equals 10; minus 10 equals 0).

2 If the taxpayer were required to use 30 segments and his `Sum of digits' column is 0, then he would start with alphabetic segment No. 773, which corresponds to the alphabetic segment beginning Roseb, No. 494, which corresponds to the alphabetic segment beginning Knapp, M, No. 445, which corresponds to the alphabetic segment beginning Jars, and so on through to the 30th segment, No. 242, which corresponds to the alphabetic segment beginning Dreg.

3 If 31 segments are required, the taxpayer would continue with segment No. 723, which corresponds to the alphabetic segment beginning Pou. In the event that more than 100 alphabetic segments were required, the taxpayer would proceed into succeeding columns or if he has exhausted the column headed `Sum of digits = 9' he would continue with the column headed `Sum of digits = o.'

.06 Listing Accounts in the 30 or More Selected Alphabetic Segments .-The taxpayer must sequence his accounts as follows:

1 For the first random alphabetic segment selected, list all revolving credit accounts (see sections 5.021 and 5.022 of Rev. Proc. 64-4 for exclusions) in alphabetic order.

2 Repeat step 1 but use the second random alphabetic segment, and continue until all 30 (or more, if required) alphabetic segments are listed. List each alphabetic segment in the order in which drawn. Thus, in the example of paragraph .05, above, the list would begin with segment 773:

Roseberry, Lillian

Roseberry, Nancy

Roseberry, W. Horace

Rosebery, Frank

Roseboro, James and the alphabetic segment would end with

Ross, Dorothy. The next name would come from segment 494:

Knapp, Margaret and continue up to and including

Knight, Kiloh. The list would continue through all required alphabetic segments. If 31 were required, the 31st segment in the example of paragraph .05 is No. 723 beginning with Pou and we have through

Pouchet, Paul

Pouge, John

Powelson, Roy.

3 If separate files are maintained for separate stores or for different billing centers serving a group of stores, then the list should start over again for each such separate file.

4 Permissible exclusions of accounts from the selected alphabetic segments. After the taxpayer has determined which alphabetic segments he is to use, he may wish to exclude nonrevoling credit accounts (see section 5.021 of Rev. Proc. 64-4) and zero balance accounts (see section 5.022 of Rev. Proc. 64-4). The exclusion of certain types of revolving credit accounts provided by section 5.023 of Revenue Procedure 64-4 should not be followed in connection with the alphabetic segment sampling procedure of this section.

5 Section 5.024 of Revenue Procedure 64-4 must be followed.

.07 Each list must be serially numbered after sequencing. A taxpayer who sequences in accordance with paragraph .063 above, may elect to begin the serial numbering anew at each establishment or he may elect to continue the sequence through all establishments.

.08 Number of Accounts To Be Analyzed .

1 Determine the number of accounts listed as a result of paragraphs .06 and .07, above.

2 Multiply the number of accounts obtained as a result of step 1 by 1,000.

3 Divide the product obtained as a result of step 2, above, by the number of alphabetic segments used (see par. .03, above). The quotient is an estimate of the number of accounts in the frame and should be entered in the block identified `Number of accounts in frame' of Exhibit 2 for the current year and labeled `est.' For example, if 31 segments include 1,250 accounts, then 1,250 multiplied by 1,000 and divided by 31 equals 40,323 accounts.

4 Multiply the number obtained as a result of step 3 by .006. If the product is less than 240, increase it to 240. If the product is more than 4,800, reduce it to 4,800.

5 Refer to Exhibit 2 for the previous year and determine the percentage of sample accounts that were nulls (line 14 and `Total of all subsamples' column).

6 Increase the amount determined from step 4, above, by the percentage of nulls determined from step 5. For example, the estimated accounts in the frame are 40,323. Step 4 yields 40,323 multiplied by .006 equals 242. If step 5 shows 10 percent nulls, then 10 percent of 242 is 24, which is added to 242 to obtain 266.

7 Subtract the percentage of nulls from 100 to obtain the percentage allocable. Continuing the previous example, there are 10 percent nulls, and therefore, 90 percent are allocable.

8 Divide the number obtained as a result of step 6 by the percentage allocable (expressed as a decimal). This is the number of accounts to be analyzed. For example, 266 divided by .90 equals 296 and 296 accounts are to be analyzed as described below. Note that this number is never less than 240 accounts.

.09 Selection of Accounts To Be Analyzed .

1 Multiply the number of accounts obtained for paragraph .081 by 5. For example, 5 multiplied by 1,250 equals 6,250.

2 Divide the result of step 1 by the number of accounts to be analyzed as determined from paragraph .088, above. Drop any remainder. The quotient is called the `skip interval.' The taxpayer may decrease the skip interval but should not increase it. For example, 6,250 divided by 296 equals 21.1 and the maximum skip interval is 21. For convenience this may be reduced to 20.

3 To obtain the random starting points, refer to Table 1, `List of Starting Points,' of Revenue Procedure 64-4, and find the section for the skip interval determined above. These random starting points cannot be duplicates. Each of the 10 sections of Table 1 has 10 columns. Determine the column to use by using the number found in .051 above, i.e. , the sum of the last digits of the taxpayer identifying number and the year (minus 10 if the sum is greater than 9). In the example in .051, column `0' of the third bank (skip intervals 20 to 49) will be used.

4 If any starting point is greater than the skip interval or is a duplicate of a previous number, omit it and go on to the next one. If necessary, use the next column. If this is column `9', continue with column `o' for the same section of skip intervals. For example, for a skip interval 20 and using column `0', the first 5 unduplicated random starting points are 3, 2, 18, 12, and 17.

5 Once the subsamples have been drawn, prepare a worksheet in the form of Exhibit 1 of Revenue Procedure 64-4, and follow the directions from section 5.047 of Revenue Procedure 64-4 through to the end of that procedure.

SEC. 3. CHANGE IN SELECTION PROCEDURE.

The table in section 5.042 of Revenue Procedure 64-4 is changed to read as follows:

                                             Accounts required

Revenue Procedure 64-4, C.B. 1964-1 (Part 1), 644 is modified by section 3 above and is amplified by adding thereto the optional procedure and the tables contained herein.

        TABLE 4.--List of 1,000 alphabetic segments to be used