Rev. Proc. 80-51

Section 1. Purpose

The purpose of this revenue procedure is to provide general procedures under section 1.446-1(e) of the Income Tax Regulations for obtaining the consent of the Commissioner of Internal Revenue to requests for changes in methods of accounting for federal income tax purposes.

This revenue procedure modifies and/or supersedes Rev. Proc. 70- 27, 1970-2 C.B. 509; Rev. Proc. 71-16, 1971-1 C.B. 682; Rev. Proc. 71-16 Amendment I, 1971-2 C.B. 527; Rev. Proc. 72-24, 1972-1 C.B. 749; Rev. Proc. 74-51, 1974-2 C.B. 507; Rev. Proc. 75-18, 1975-1 C.B. 687; and Rev. Proc. 76-8, 1976-1 C.B. 547.

Sec. 2. Background

.01 Section 446(e) of the Internal Revenue Code and section 1.446-1(e) of the regulations provide that in order to change a method of accounting for federal income tax purposes, the taxpayer must obtain the consent of the Commissioner. Section 1.446-1(e)(3)(i) requires that in order to obtain such consent, an application must be made within 180 days after the beginning of the taxable year in which the proposed change is requested to be made. Section 1.446- 1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to a change in its method of accounting in accordance with section 446(e).

.02 Section 481(a) of the Code requires that those adjustments necessary to prevent amounts from being duplicated or omitted be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year. Section 481(c) and section 1.481-5 of the regulations provide that the adjustment required by section 481(a) may be taken into account in determining taxable income in the manner and subject to the conditions agreed to by the Commissioner and the taxpayer.

.03 Methods of accounting should clearly reflect income on a continuing basis, and the Internal Revenue Service administers its discretion under sections 446(e) and 481(c) of the Code so that, in general, any distortion of income on an annual basis is minimized. When there is a change in method of accounting, income for the year preceding the year of change must be determined under the method of accounting that was then employed, and income for the year of change and the following years is determined under the new method of accounting. The section 481(a) adjustment, while necessary to prevent duplications or omissions of income or deductions, by its nature is distortive since it does not reflect the economic income of the year. An adjustment period for the section 481(a) adjustment is provided for in sections 5.05 and 5.06 of this revenue procedure and is intended to reduce the possibility of a change in method of accounting from itself creating a material distortion in income in the year of change and to reduce any distortion when it does exist. Also, amounts attributable to changes in methods of accounting are taken into account in determining earnings and profits in a manner consistent with the provisions of this revenue procedure.

.04 While the adjustment period is designed to ameliorate, at least in part, the otherwise distortive effect of the section 481(a) adjustment, the Service believes that in order to further compliance with proper methods of accounting, situations exist when allowing an adjustment period of more than 1 year is not appropriate. In such cases, a period of only 1 year is available. (See section 4.012 of this revenue procedure.) Similarly, the Service believes that certain situations exist when it is not appropriate to allow more than a 5- year period. (See section 5.11.) In addition, the Service believes as a general matter that it is appropriate that the adjustment period not be greater than the period that gave rise to the section 481(a) adjustment. (See section 5.06.)

Sec. 3. Changes

.01 This revenue procedure contains several major changes and amplifications in the procedures for obtaining the Commissioner's consent to a change in method of accounting. These changes and amplifications are made to encourage compliance with proper methods of accounting when a taxpayer is determining taxable income in accordance with one or more methods of accounting that are proscribed by the Code, regulations, decisions of the Supreme Court of the United States, revenue rulings and revenue procedures. This section highlights the major changes and amplifications.

.02 Section 4.012 provides new procedures that preclude a taxpayer that is using a Category A method of accounting from applying for a change in such method of accounting under this revenue procedure after the taxpayer is contacted in any manner by a representative of the Service for the purpose of scheduling an examination. A Category A method of accounting is defined in section 6.02 as a method of accounting that is specifically not permitted by the Code, regulations, or by a decision of the Supreme Court of the United States.

.03 Section 5, in general, amplifies the procedures to be followed in requesting consent to change a method of accounting.

.04 Section 5.02 expands the rules and procedures to be followed when a taxpayer files an application for change in method of accounting before and after the first 180 days of the taxable year for which the change is requested. Early applications filed up to 6 months before the beginning of the taxable year of change will be processed in accordance with section 5.03 of this revenue procedure. Late applications not accepted by the Service under the provisions of section 1.9100-1 of the regulations may be considered to apply to the subsequent taxable year.

.05 Section 5.06 explains the section 481(a) adjustment periods for the purpose of taking into account the appropriate adjustment resulting from the change in method of accounting. These adjustment periods are similar to the "spread periods" referred to in Rev. Proc. 80-5, 1980-1 C.B. 582. The period of years over which a section 481(a) adjustment is to be made now depends upon the facts and circumstances in each case. However, the adjustment period may not exceed 10 taxable years and in some cases may be 1 taxable year.

.06 Section 5.10 eliminates the 20-year adjustment period provided for by Rev. Proc. 71-16, Rev. Proc. 71-16, Amendment I, and Rev. Proc. 72-24, with respect to the discontinuance of the last-in, first-out (LIFO) inventory method. The adjustment period over which the section 481(a) adjustment is to be taken will be determined under the rules set forth in section 5.06. The adjustment period will not exceed 10 taxable years and once the change has been made to discontinue the use of the LIFO inventory method the taxpayer will be required to stay on the new method of accounting for a period of at least 10 taxable years unless the Commissioner consents to a change at an earlier time.

.07 Sections 5.11, 10.02 and 11.03 modify and supersede Rev. Proc. 74-51 and allow an adjustment period for the section 481(a) adjustment of up to 5 taxable years with respect to certain changes to the full absorption method of inventory costing prescribed by section 1.471-11(a) of the regulations. During the transition period prescribed by section 1.471-11(e)(3), taxpayers were allowed an adjustment period not to exceed the lesser of 10 taxable years commencing with the year of transition or the number of years the taxpayer had been on the inventory method from which it was changing. Since the transitional rules of section 1.471-11(e) do not apply to taxable years beginning after September 19, 1975, the Service issued Rev. Proc. 74-51 to prevent taxpayers from applying under Rev. Proc. 70-27 for an adjustment period that would tend to frustrate the purpose of the transitional rules. Rev. Proc. 74-51 modified Rev. Proc. 70-27 to provide that it will not apply to a taxpayer changing to the full absorption method of inventory costing as required by section 1.471-11(e)(1)(i). Now, applications filed in accordance with the procedures set forth in Rev. Proc. 75-40, 1975-2 C.B. 571, will be allowed an adjustment period of up to 5 taxable years.

.08 Section 5.12 modifies the procedures that apply to taxpayers under examination by providing that a taxpayer using a Category B method of accounting (defined in section 6.03) may change its method of accounting while under examination. However, certain conditions (such as year of change) are imposed, and in the case of certain types of changes of methods of accounting (generally those designated by a revenue ruling or revenue procedure) the adjustment period is limited to 5 taxable years.

.09 Section 5.121 changes the year of change for which a change is granted with respect to taxpayers under examination. If the method being changed involves an issue raised by the Service during such examination, the year of change will be the most recent taxable year that is being examined by the Service, but not later than the most recent taxable year for which a federal income tax return has been filed as of the date such examination began.

.10 Section 11 is a new provision that sets forth the effective dates. Generally the provisions of this revenue procedure will be effective on December 1, 1980. However, except for changes in method of accounting to which Rev. Proc. 80-5 and Rev. Proc. 74-51 applied, the provisions of sections 4.012 and 5.12 are effective with respect to applications for change in accounting method (Form 3115) filed on or after December 1, 1982. Special effective dates are provided with respect to the elimination of the 20-year adjustment period provided when LIFO is discontinued and for the allowance of a 5-year adjustment period when changing the full absorption method of inventory costing.

Sec. 4. Scope

.01 This revenue procedure applies to Form 3115, Application for Change in Accounting Method, filed by all taxpayers except those cases:

1 Under examination by the Service in which the year or years under examination encompass the taxable year in which the erroneous method was initiated by the taxpayer or in which the taxpayer changed to a method of accounting without consent of the Commissioner;

2 In which the method to be changed is a Category A method of accounting (as defined in section 6.02 of this revenue procedure), and the taxpayer has been contacted in any manner by a representative of the Service for the purpose of scheduling an examination of its federal income tax return(s) and such examination has not been completed (but see section 4.02);

3 When at the time of filing Form 3115 the taxpayer is:

(a) Under examination by the district director, except as provided in sections 4.02, 5.12 and 7.03 of this revenue procedure;

(b) Under consideration by an appeals office of the Service with respect to an examination; or

(c) Before any federal court with respect to an income tax issue, unless the taxpayer has obtained an agreement from counsel for the Government that there is no objection to the proposed change in method of accounting;

4 Involving a termination of a taxpayer's use of the LIFO inventory method by the Service (see section 3.01 of Rev. Proc. 79- 23, 1979-1 C.B. 564); or

5 In which there is pending a criminal investigation or proceeding concerning, (a) directly or indirectly the taxpayer's federal tax liability, or (b) the possibility of false or fraudulent statements made by the taxpayer with respect to its federal tax liability.

.02 Section 4.01 2 will not apply during a 90-day period following the date of issuance by the Service of either a letter stating that there is no change in the tax liability or a basic report form (a report of Individual Income Tax Examination Changes, a report of Income Tax Examination Changes, a report of Income Tax Audit Changes, or an Unagreed and Excepted Agreed report) signifying notice of results of an examination by the Service of the taxpayer's liability for certain taxable years. The examination of cases placed or held in suspense under subsection 4559 of the Internal Revenue Manual should be completed for all issues not in suspense and a partial agreement requested. The issuance of a basic report form in such cases begins the 90-day period specified above. However, section 4.01 2 will be applied and the 90-day rule set forth above will not apply with respect to a Category A method of accounting that is included as an item of adjustment as a result of the examination by the Service or the method of accounting (Category A) issue is placed in suspense by the Service.

.03 Should a Category B method of accounting (defined in section 6.03 of this revenue procedure) be an issue that is placed in suspense by the Service and the taxpayer desires to change such Category B method of accounting to a proper method of accounting, the taxpayer may file an application for change in accounting method under the provisions of this revenue procedure.

.04 If section 4.012 applies, the change in method of accounting shall be made by the district director.

.05 Except as provided in section 5.12, this revenue procedure does not provide for retroactive changes for a taxable year for which a federal income tax return has been filed.

.06 The Service reserves the right to decline to process an application for change in accounting method filed under this revenue procedure in situations in which it would not be in the best interest of sound tax administration to permit the requested change. In this regard the Service will consider whether such change in method of accounting would clearly and directly frustrate compliance efforts of the Service in administering the income tax laws.

Sec. 5. Procedures

.01 Submission of application for change in method of accounting.

In general, an application for a change in method of accounting should be filed on Form 3115 within 180 days after the beginning of the taxable year for which the change in method of accounting is requested to be made.

.02 Late applications for change in method of accounting.

1 The purpose of the 180-day rule is to provide the Service adequate time to process the numerous applications prior to the original due date of taxpayers' returns. A Form 3115 that is not filed within the 180-day period may, under section 1.9100-1 of the regulations, nevertheless be considered as timely filed upon the showing of good cause in accordance with the requirements of Rev. Proc. 79-63, 1979-2 C.B. 578. However, for purposes of this revenue procedure, applications received beyond 9 months after the beginning of the year of change will be considered to jeopardize the interests of the Government (see section 1.9100-1(a)(3) of the regulations and section 2 of Rev. Proc. 79-63) except in very unusual and compelling circumstances.

2 If a Form 3115 has been filed after the 180-day period and the Service does not grant relief under section 1.9100-1 of the regulations, the taxpayer may choose to have the application apply to the subsequent taxable year under the procedures prescribed in section 5.03 below. Such choice must be made within 30 days after the issuance by the Service of a denial of relief under section 1.9100-1, by filing a statement with the National Office addressed in accordance with section 7.01 of this revenue procedure. If such choice is timely made and the requirements of section 5.03 are met, the application will be considered a qualified application timely filed for purposes of this revenue procedure at the time Form 3115 was filed for which relief under section 1.9100-1 was requested.

.03 Early applications for change in method of accounting.

A qualified application for a change in method of accounting filed within a 6-month period before the beginning of the year of change will be considered as being timely filed for purposes of this revenue procedure. To qualify, (a) the Form 3115 must be complete in all respects except for the amount of the adjustment under section 481(a) for the year of change, and (b) the amount of such section 481(a) adjustment be furnished to the Service within the first 90 days after the beginning of the year of change. The filing of a qualified application for change in method of accounting in this manner will be considered to be an application for a change in method of accounting at the time of the original filing of the Form 3115. The processing order of a Form 3115 filed under the provisions of this subsection will be determined by the date all information (including the amount of the section 481(a) adjustment) has been furnished. In order to assist in the processing of Forms 3115 filed under this early filing procedure, and to insure proper handling, reference to this special procedure should be made a part of the Form 3115 by putting at the top of the Form 3115: "FILED UNDER SEC. 5.03 of REV. PROC. 80-51."

.04 Processing applications (Form 3115).

In processing applications for change in method of accounting the Service will consider all facts and circumstances. Such consideration will include:

1 Whether the method of accounting requested is consistent with the Code, regulations, revenue rulings, revenue procedures and decisions of the Supreme Court of the United States;

2 Whether the use of that method will clearly reflect income;

3 The taxpayer's reason(s) for the change; and

4 The tax effect of the adjustment under section 481(a) of the Code.

.05 Approval.

Approval of an application for change in method of accounting will normally be conditioned on the taxpayer proposing and agreeing as one of the conditions to the change to take the adjustment required under section 481(a) of the Code ("adjustment") into account in computing taxable income and earnings and profits (see Rev. Proc. 79-47, 1979-2 C.B. 528) over a period considered appropriate by the Commissioner, and proposing and agreeing to those other terms and conditions deemed appropriate by the Commissioner to clearly reflect, or prevent a distortion of, income. Such an approved change shall be considered to be a change in method of accounting initiated by the taxpayer.

.06 Section 481(a) adjustment period.

1 The appropriate period for taking into account an adjustment, whether positive or negative, referred to in section 5.05 ("adjustment period") is generally determined as follows:

(a) When the entire net amount of an adjustment is attributable to the taxable year immediately preceding the year of change (first preceding year), the total net adjustment is to be taken into account in computing taxable income for the year of change. The amount attributable to the taxable year immediately preceding the year of change is the difference in the amount of the adjustment determined under section 481(a) of the Code for the year of change and the amount of the adjustment that would have been required under section 481(a) if the same change in method of accounting had been made in such preceding year.

(b) When (a) does not apply and 67 percent or more of the net amount of an adjustment is attributable to the 1-taxable year period, 2-taxable year period, or 3-taxable year period immediately preceding the year of change, the highest percent attributable to such 1, 2, or 3-taxable year period is to be taken into account ratably over a 3- taxable year period beginning with the year of change. Any remaining balance is to be taken into account ratably over an additional period equal to the remainder of the number of taxable years the taxpayer has used the method of accounting that is being changed. However, the total adjustment period shall not exceed 10 taxable years. This subparagraph 5.06 1(b) only applies if the taxpayer has used the method being changed for more than 3 taxable years. If the method of accounting being changed has been used for no more than 4 taxable years, 75 percent shall be substituted for 67 percent. An amount attributable to such 1, 2, or 3-taxable year period is the difference in the amount of the adjustment determined under section 481(a) of the Code for the year of change and the amount that would have been required under section 481(a) if the same change had been made at the beginning of such preceding 1, 2, or 3-taxable year period.

(c) In all other situations in which (a) and (b) above do not apply, the total net adjustment is to be taken into account ratably over the number of taxable years (not to exceed 10) the taxpayer has used the method of accounting that is being changed.

2 In applying sections 5.061(a) or (b), if a taxpayer's books and records do not contain sufficient information to compute the section 481(a) adjustment attributable to the 1, 2, or 3-taxable year period immediately preceding the year of change, the taxpayer may reasonably estimate such amounts and attach and sign (or have signed by an officer who has personal knowledge of the facts) the following statement to the Form 3115:

Under penalty of perjury, I hereby certify that:

(a) the books and records of [name of the taxpayer] do not contain sufficient information to permit a computation of the section 481(a) adjustment attributable to the 1-taxable year period, 2- taxable year period, or 3-taxable year period immediately preceding the year of change as required by section 5.061(b) of Rev. Proc. 80- 51.

(b) Based on the information that is contained in such records, to the best of my information and belief, the entire amount of the section 481(a) adjustment for the year of change [indicate either "is" or "is not," as the case may be] attributable to the taxable year immediately preceding the year of change, and 67 percent [or "75 percent," in applicable cases] or more of the section 481(a) adjustment for the year of change [indicate "is" or "is not," as the case may be] attributable to the 1-taxable year period, 2-taxable year period, or 3-taxable year period immediately preceding the year of change.

3 A cooperative within the meaning of section 1381(a) of the Code shall generally take the total net amount of an adjustment into account in computing taxable income for the year of change. See Rev. Rul. 79-45, 1979-1 C.B. 284. The Service in its discretion may, however, require the adjustment to be taken into account ratably over a period of taxable years when it determines such action is appropriate.

.07 LIFO Election.

If a taxpayer elects the LIFO method of inventory valuation during the adjustment period referred to in section 5.06, the balance of the unamortized section 481(a) adjustment referred to in sections 5.05 and 5.06 attributable to a change in inventory valuation from a method with respect to which an adjustment under section 472(d) of the Code would have been required, must be taken into account in full in computing taxable income in the year for which such election is made. This subsection shall only apply to the portion of the unamortized section 481(a) adjustment attributable to the portion of the inventory with respect to which LIFO is elected.

.08 Reduction in Inventory Value.

1 If the change in method of accounting involves a change in method of inventory valuation and on the last day of any taxable year during the adjustment period referred to in section 5.06 the value of the taxpayer's inventory to which the section 481(a) adjustment relates is reduced by more than 331/3 percent of such inventory value at the beginning of the first taxable year in the adjustment period (see sections 5.05 and 5.06), the balance of the net section 481(a) adjustment must be taken into account in full in determining taxable income in the year of such inventory reduction.

2 Section 5.081 shall not apply if the taxpayer has shown to the satisfaction of the Commissioner that such reduction is attributable to a strike, involuntary conversion, or involuntary interruption of the availability of goods. This paragraph 5.082 shall apply only if the taxpayer has obtained the consent of the Commissioner. Such consent must be requested no later than 90 days after the end of the taxable year in which section 5.081 would otherwise apply.

.09 Ceasing to engage in the trade or business.

1 With respect to a corporation:

If the taxpayer ceases to engage in the trade or business, to which the adjustment (sections 5.05 and 5.06) relates, at any time prior to the expiration of the adjustment period referred to in section 5.06, the taxpayer shall take into account in such year the balance of the adjustment not previously taken into account in computing taxable income. See Rev. Rul. 80-39, 1980-1 C.B. 112, which holds that if a division of a corporation, for which a change in method of accounting had been granted, ceases to operate the trade or business for which the change in method was granted, the remaining section 481(a) adjustment applicable to the business conducted by that division of the corporation must be taken into income in the year the corporation ceases to engage in that trade or business. For purposes of this condition, the taxpayer is not considered to have ceased the trade or business if such cessation is the result of a transaction to which section 381 of the Code applies, but in such case the acquiring corporation shall continue to be subject to this revenue procedure as though it were the acquired corporation.

2 With respect to a partnership:

In the event a partnership terminates or ceases to engage in the trade or business (within the meaning of section 708 of the Code), to which the adjustment (sections 5.05 and 5.06) relates, at any time prior to the expiration of the adjustment period referred to in section 5.06, the balance of the adjustment not previosuly taken into account in computing ordinary income shall be taken into account in such year. A partnership ceasing to engage in the trade or business includes the incorporation of such trade or business in a transaction to which section 351 applies (see Rev. Rul. 77-264, 1977-2 C.B. 187).

3 With respect to a sole proprietor:

If the taxpayer ceases to engage in the trade or business, to which the adjustment (sections 5.05 and 5.06) relates, at any time prior to the expiration of the adjustment period referred to in section 5.06, the balance of the adjustment not previously taken into account in computing taxable income shall be taken into account in such year. A sole proprietor ceasing to engage in the trade or business includes the incorporation of such trade or business in a transaction to which section 351 of the Code applies (see Rev. Rul. 77-264). A sole proprietorship does not cease to engage in that trade or business when the individual taxpayer sells a partial interest in the proprietorship and continues to be actively engaged in the management of the business that is subsequently operated as a partnership. The section 481(a) adjustment remaining at the time the partnership is formed is taken into account by the partnership as though there had been no change in ownership (see Rev. Rul. 66-206, 1966-2 C.B. 206).

.10 Discontinuance of LIFO.

Rev. Proc. 71-16, Rev. Proc. 71-16 Amendment I and Rev. Proc. 72-24 concern a taxpayer's request to discontinue the use of the LIFO inventory method. Such a change is a change in method of accounting within the meaning of sections 446 and 481 of the Code and is subject to the provisions of this revenue procedure. Consent to discontinue the use of the LIFO inventory method and change to another acceptable method of inventory accounting that the Service determines will clearly reflect income normally will be granted subject to the requirements of section 1.472-6 of the regulations and the provisions of this revenue procedure, provided the taxpayer agrees to:

1 an adjustment period determined in accordance with the rules set forth in section 5.06 of this revenue procedure;

2 not to elect the LIFO inventory method of accounting for a period of at least 10 taxable years beginning with the year of change, unless consent is granted by the Commissioner to change the method of accounting at an earlier time based on a showing of extraordinary circumstances; and

3 to comply with any other terms and conditions that may be prescribed by the Commissioner (see section 5.05).

.11 Full absorption method of inventory costing.

With respect to applications filed by manufacturers and producers for consent to change to the full absorption method of inventory costing prescribed by section 1.471-11(a) of the regulations, the adjustment period otherwise determined in section 5.06 shall not exceed 5 taxable years.

.12 Taxpayer under examination.

A taxpayer that has been contacted by a representative of the Service for the purpose of scheduling an examination of its federal income tax return may obtain consent to change its method of accounting under this revenue procedure provided the method to be changed is a Category B method as defined in section 6.03 of this revenue procedure. Consent to make the requested change will normally be granted provided the taxpayer proposes and agrees:

1 That the year of change shall generally be,

(a) if the method being changed involves an issue raised by the Service during such examination, the most recent taxable year that is being examined by the Service during the examination of the taxpayer's returns, but not later than the most recent taxable year for which a federal income tax return has been filed as of the date the examination began, or,

(b) in other cases, the applicable taxable year that would apply at the time the application is filed if the taxpayer had not been under examination;

2 If the method to be changed has been designated by a revenue ruling or revenue procedure that was published in the Internal Revenue Bulletin more than 2 years prior to the date the Form 3115 is filed, as a change in method of accounting with respect to which section 5.12 2 applies, the adjustment period otherwise determined under section 5.06 shall not exceed 5 taxable years; and

3 To comply with any other terms and conditions that may be prescribed by the Commissioner (see section 5.05).

.13 Examples of the rules prescribed in section 5.061 with respect to the section 481(a) adjustment.

Example A:

Z timely files an application to change its method of accounting for a specific item of expense to a method that the Service determines will clearly reflect income beginning with the taxable year ending December 31, 1981 (year of change). Z has used the method of accounting that is being changed for 12 taxable years. The adjustment required under section 481(a) of the Code for the year of change is $60,000. If Z had made the requested change in method of accounting for the taxable years ended December 31, 1978, 1979 or 1980, the amount of the adjustment would have been $42,000, $5,400 or $48,500, respectively. The percent of the section 481(a) net adjustment attributable to the 1, 2, or 3-taxable year period preceding the year of change is determined as follows:

                       1-Taxable Year Period

Example B

Y timely files an application to change its method of accounting for valuing inventory to a method that is in accord with the provisions of section 1.471-4 of the regulations, beginning with its taxable year ending November 30, 1981. The information furnished shows that Y used its present method of valuing inventory for 9 taxable years prior to the year of change and that the net adjustment required under section 481(a) of the Code for the year of change is $300,000. The information furnished further shows that had the change been made for the taxable year ending November 30, 1980, the adjustment required under section 481(a) would have been zero or a negative amount. Thus, the entire amount of the adjustment is attributable to the taxable year immediately preceding the proposed year of change. Under these circumstances and based on the provisions of section 5.061(a) of this revenue procedure, Y will take the entire $300,000 net adjustment into account in computing its taxable income for the taxable year ending November 30, 1981. If the information furnished had shown that had the change been made for the taxable year ending November 30, 1980, the adjustment required under section 481(a) would have been $300,000 and had the change been made for the taxable year ending November 30, 1979, the adjustment required under section 481(a) would be zero or a negative amount, the $300,000 would be taken into account ratably over the 3 taxable years beginning with the taxable year ending November 30, 1981.

Example C

W timely files an application to change its method of accounting for reporting income from long-term contracts from the percentage of completion method to the completed contract method, beginning with its taxable year ending September 30, 1981. The information furnished shows that W used the percentage of completion method for 4 taxable years prior to the year of change and the net negative adjustment required under section 481(a) of the Code for the year of change is $55,000. The information furnished further shows that the highest percent of the net negative adjustment attributable to the 1, 2, or 3-taxable year peiod preceding the proposed year of change was 63 percent. Under these circumstances and based on the provisions of section 5.061(c) of this revenue procedure, W will take the $55,000 adjustment into account ratably over 4 taxable years beginning with the taxable year ending September 30, 1981.

Example D

The taxpayer, a wholesaler, has for the past 10 years omitted freight-in from the computation of inventories and now desires to correct this practice. The year of change is the taxable year beginning January 1, 1981. The value of the taxpayer's inventory as of December 31, 1980 (the end of the year preceding the year of change), was $365,000, which did not include freight-in. The amount of freight-in omitted from that inventory was $45,000. The value of the inventory as of January 1, 1981 (the beginning of the year of change), computed in accordance with the new method of accounting to be adopted by the taxpayer is $410,000. The change in method of accounting is treated as a change initiated by the taxpayer, and thus the net section 481(a) adjustment is $45,000 ($410,000 - $365,000).

The hypothetical section 481(a) adjustments that would have been required if made in the 1, 2, or 3-taxable year period immediately preceding the year of change are as follows:

 1-taxable year period (Ending December 31, 1980) ______ $30,000

Sales ________________________________________ $800,000

.01 Year of change.

The taxable year for which a change is effective is the year of change. The year of change is the first taxable year for taking the adjustment referred to in section 5.06 of this revenue procedure into account and for complying with any other terms and conditions set forth in the Commissioner's consent letter (see section 1.446- 1(e)(3)(ii) of the regulations). See also section 5.12 of this revenue procedure.

.02 Category A method of accounting.

A Category A method of accounting is a method of accounting that is specifically not permitted to be used by the taxpayer by the Code, regulations, or by a decision of the Supreme Court of the United States. Examples of methods within Category A are:

1 Methods of inventory valuation listed in sections 1.471- 2(f)(1) through (7) of the regulations.

2 A write-down of goods in inventory that does not comply with section 1.471-2(c) of the regulations. For example, goods are written down without being sold or offered for sale.

3 A write-down of any goods in inventory that does not comply with section 1.471-4(b) of the regulations. For example, see Rev. Rul. 77-364, 1977-2 C.B. 183, in which a taxpayer determined the market value of goods in inventory by dividing the inventory into classes based upon sales activities and then reducing the value of each class by a percentage of cost assigned thereto.

4 The write-down of what is regarded as "excess" inventory by a taxpayer to a net realizable value although such inventory has not been scrapped, sold, or offered for sale at the reduced price. (Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979), 1979-1 C.B. 167, and section 1.471-4(b) of the regulations.)

5 In the absence of a specific statutory or regulatory exception, the use of the cash receipts and disbursements method of accounting for the sale of merchandise when such merchandise is an income-producing factor and therefore inventories are required. (Section 1.446-1(c)(2) and Example 1 of section 1.446-1(e)(2)(iii) of the regulations.)

6 The use of a long-term contract method of accounting for income from contracts that clearly do not involve building, installation, construction or manufacturing. (Section 1.451-3(b) of the regulations.)

7 The use by a manufacturer of a method of inventory costing that does not conform to the requirements of section 1.471-11 of the regulations relating to the full absorption method of inventory costing.

8 The use of a method of accounting other than that prescribed by section 447 of the Code by a farming corporation subject to that section.

9 The use, in taxable years beginning on or after September 19, 1979, of a method of accounting under section 1.163-4(a) of the regulations, which provides for the deduction of interest as original issue discount, with respect to obligations with a term of 1 year or less. (Section 1.1232-3(b)(1)(iii).)

.03 Category B method of accounting.

Category B methods are all methods other than those specifically not permitted to be used by the taxpayer by the Code, regulations or decisions of the Supreme Court of the United States.

.04 Filed.

For purposes of this revenue procedure, a Form 3115 is filed at the time it is mailed (under the rules of section 7502 of the Code) or delivered to, and received by, the Service.

Sec. 7. Application

.01 A taxpayer wishing to invoke the provisions of this revenue procedure should complete and file a current Form 3115 with the Commissioner of Internal Revenue, Attention: T:C:C:1, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, and request the application of Rev. Proc. 80-51. The taxpayer must provide all the information required on such application (current Form 3115) and state that it proposes to take the adjustment into account over the appropriate period required by section 5.06 above. If the Service receives an application that is not properly completed in accordance with the instructions on the Form 3115, it will notify the taxpayer. Such notification will specify those items that need to be corrected and, when appropriate, transmit a current blank Form 3115 for the taxpayer's use. For example: The General Instructions contained on page 4 of the Form 3115 require a taxpayer to set forth all relevant facts regarding its present and proposed methods (as set forth in the application), including an explanation of why the taxpayer believes the application should be approved. In its notification, the Service will allow the taxpayer a reasonable period of time, ordinarily not more than 30 days, in which to submit the necessary information. If such information is submitted within the period of time granted by the Service, the application will be considered properly completed as of the date of original filing. If the information is not submitted within the time allowed, the application will be closed. If the information is received after the application is closed, it will be reopened and treated as a new application filed as of the date the information is received. The preceding four sentences shall not apply in the case of early applications submitted in accordance with section 5.03 of this revenue procedure.

.02 The signature of the individual or person preparing the application for the taxpayer must appear in the space at the bottom of page 1 on the Form 3115. An application made by an agent on behalf of a taxpayer must be accompanied by a power of attorney authorizing the agent to sign for the taxpayer. If the agent is also authorized to represent the taxpayer before the Service, receive the original or a copy of correspondence concerning the request, or perform any other act(s) regarding the application on behalf of the taxpayer, the power of attorney must reflect such authorization(s). If the taxpayer is a member of an affiliated group that has elected to file a consolidated federal income tax return, a Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. (See section 1.1502-77 of the regulations.)

.03 A request for the application of this revenue procedure under section 5.12 of this revenue procedure shall be made by the taxpayer in a letter addressed to the Commissioner of Internal Revenue, Attention: T:C:C:1. This request together with a properly completed current Form 3115 should be sent to the district director for the district in which the return is being examined. The district director will forward the application and pertinent comments to the National Office and suspend examination action on the accounting method issue pending completion of action by the National Office on the taxpayer's request. The district director should verify that the amount of the section 481(a) adjustment is correct, that it has not been reduced by an amount attributable to taxable years prior to 1954, and that the adjustment period and year of change have been determined in accordance with section 5.12. The Form 3115 should not be sent to the National Office unless the taxpayer and district director are in agreement with respect to the year of change, the amount of the section 481(a) adjustment and the adjustment period. If the taxpayer and district director cannot agree as to these items, a technical advice request may be submitted to the National Office in accordance with Rev. Proc. 80-26, 1980-1 C.B. 671.

.04 Sections 9 (specifically subsections 9.10, 9.11, 9.15 and 9.21), 11, 15, 16 and 17 of Rev. Proc. 80-20, 1980-1 C.B. 633, pertaining respectively to Instructions to Taxpayers, Conference in the National Office, Withdrawal of Requests, Oral Advice to Taxpayers, and Effect of Rulings, are applicable to applications for changes in accounting methods (Form 3115) filed under this revenue procedure.

Sec. 8. Miscellaneous

.01 Conferences in the National Office.

1 The taxpayer should state in writing at the time the Form 3115 is filed under this revenue procedure whether the taxpayer or the taxpayer's authorized representative desire a conference if an adverse response is contemplated by the Service. If a conference is not specifically requested in writing at the time the taxpayer files Form 3115 under this revenue procedure or in a later written communication, the Service will presume that the taxpayer does not desire a conference.

2 If the taxpayer specifically states in writing that a conference is desired if an adverse response is contemplated by the Service, a conference will be arranged in the National Office prior to the Service's formal reply to the taxpayer's application. See section 11, Rev. Proc. 80-20.

.02 Other offices of the Service.

The provisions of this revenue procedure are not intended to preclude an appropriate representative of the Service (including an appeals officer) from settling a particular taxpayer's case involving an accounting method issue by means of agreeing to terms and conditions in the best interest of the Government. In such case, the terms and conditions used for this purpose may not contain a provision that:

1 Permits an adjustment period of more than 10 taxable years or more years than the method has been used by the taxpayer, whichever is shorter;

2 Permits an adjustment period of more than 5 taxable years when the change is to the full absorption method of inventory costing; or

3 Establishes the year of change as a year later than the year specified in section 5.121(a).

However, the terms and conditions may be more restrictive than those provided by this revenue procedure.

Sec. 9. Inquiries

Inquiries in regard to this revenue procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention: T:C:C:1, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

Sec. 10. Effect on Other Documents

.01 Rev. Proc. 74-11, 1974-1 C.B. 420 (pertaining to changes in method of depreciation accounting); Rev. Proc. 64-51, 1964-2 C.B. 1003 (pertaining to procedures for changing the method of accounting for bad debts from the specific charge-off method to the reserve method) as amplified by Rev. Proc. 70-15, 1970-1 C.B. 441 and as modified by Rev. Proc. 77-39, 1977-2 C.B. 573; and Rev. Proc. 80-5, 1980-1 C.B. 582 (pertaining to the decision of the Supreme Court of the United States in Thor Power Tool Co. v. Commissioner), are not affected by this revenue procedure. Form 3115 submitted by the taxpayer with respect to Rev. Proc. 74-11 is to be filed with the appropriate Internal Revenue Service Center and is not to be sent to the National Office.

.02 Rev. Proc. 76-8, and Rev. Proc. 74-51 are modified and superseded effective December 1, 1980.

.03 Rev. Proc. 72-24 is superseded effective December 1, 1980.

.04 Rev. Proc. 71-16 and Rev. Proc. 71-16 Amendment I are modified and superseded effective for applications for changes in accounting method (Form 3115) filed after December 1, 1980.

.05 Section 4.03 of Rev. Proc. 70-27 and section 2.03 of Rev. Proc. 75-18 are superseded effective December 1, 1982. All other provisions of Rev. Proc. 70-27 and Rev. Proc. 75-18 are superseded effective December 1, 1980.

Sec. 11. Effective Date

.01 The provisions of section 4.012 (taxpayer using a Category A method of accounting scheduled for an examination) and section 5.12 (taxpayer under examination, Category B method of accounting involved) of this revenue procedure are effective with respect to applications for change in accounting method (Form 3115) filed on or after December 1, 1982. However, the provisions of section 4.01 2 are effective with respect to Forms 3115 filed on or after December 1, 1980 with respect to changes in method of accounting to which: (1) Rev. Proc. 80-5 (which waives the 180-day rule and grants consent to taxpayers' applications to change from a method of accounting for inventory valuation of excess inventory, which is not in accordance with the prescribed method, to such prescribed method for the first taxable year ending on or after December 25, 1979) applies, or (2) Rev. Proc. 74-51 (full absorption inventory costing) applied.

.02 The provisions of section 5.10 (concerning discontinued use of the LIFO inventory method) are effective with respect to applications for change in accounting method (Form 3115) filed on or after December 1, 1980.

.03 The provisions of section 5.11 (concerning changes to the full absorption method) are effective with respect to changes granted after December 1, 1980. However, taxpayers who applied for and received the Commissioner's consent to change to the full absorption method of inventory costing prescribed by section 1.471-11(a) of the regulations and, pursuant to Rev. Proc. 74-51, an adjustment period of only 1 year was provided, may resubmit an application by March 1, 1981, requesting the adjustment period under section 5.06 (limited to 5 taxable years). This subsection 11.03 shall apply only if the taxable year the change to the full absorption method was originally granted is an open year under provisions of section 6501 of the Code and the taxpayer's change to the full absorption method of inventory costing was not in connection with an examination by the Service of the taxpayer's federal income tax return. Taxpayers that contemplate resubmitting an application under this subsection 11.03 may wish to protect the period of limitations for the year in which the change in method of accounting was first granted.

The application, a new Form 3115, should be filed with the National Office (see section 7 of this revenue procedure), together with a copy of the previous Form 3115 and a copy of the letter granting the full absorption change in method of accounting. As a condition to the granting of a revised Commissioner's consent letter, the taxpayer must propose and agree to pay the additional federal income tax due for the taxable years involved in the adjustment period. Upon the receipt of a revised Commissioner's consent letter granted pursuant to this subsection 11.03, the taxpayer must file an amended federal income tax return for the year of change with the appropriate Internal Revenue Service Center. Such amended return must be accompanied by a copy of the revised Commissioner's consent letter and amended returns prepared in accordance with the Commissioner's revised consent letter for all taxable years during the adjustment period with respect to which the original return has already been filed at the time of the filing of the amended return for the year of change. In order to assist in the processing of these amended returns, the taxpayer should include a covering letter clearly indicating that the amended returns are being filed in accordance with the provisions of subsection 11.03 of Rev. Proc. 80, 51 and put at the top of each amended return: "FILED UNDER SECTION 11.03 OF REV. PROC. 80-51."

.04 All other provisions of this revenue procedure are effective December 1, 1980.