IRS ANNOUNCES PROCEDURES FOR CHANGING ACCOUNTING METHODS TO COMPLY WITH OID REGS ISSUED IN JANUARY.

Rev. Proc. 94-28

SECTION 1. PURPOSE

This revenue procedure provides procedures for taxpayers to change their methods of accounting to comply with the final regulations dealing with original issue discount (OID) and other related matters (T.D. 8517, 1994-9 I.R.B. 4). The revenue procedure defines a "cut-off date" for the change, and a taxpayer makes the change only for debt instruments issued, or lending transactions, sales, or exchanges that occur, on or after this date. The year of change is the taxable year that includes the cut-off date. In general, this revenue procedure applies only to changes in methods of accounting in taxable years that end on or after December 22, 1992, or begin on or before April 4, 1994. In the case of de minimis OID, it also applies to a change in method of accounting in a taxpayer's first taxable year that begins after April 4, 1994.

SEC. 2. BACKGROUND

.01 On February 2, 1994, the Service published final rules for the treatment of OID, de minimis OID, stated interest, and unstated interest. See generally sections 1.163-7, 1.446-2, 1.483-1 through 1.483-3, 1.1001-1(g), 1.1012-1(g), and 1.1271-0 through 1.1275-5 of the Income Tax Regulations.

.02 Section 1.163-7 and sections 1.1271-0 through 1.1275-5 provide final rules for the treatment of OID, including de minimis OID. In general, the regulations apply to debt instruments issued on or after April 4, 1994. Taxpayers, however, may rely on the regulations for debt instruments issued on or after December 22, 1992, and before April 4, 1994. Sections 1.163-7(e) and 1.1271-0(a).

.03 Section 1.446-2 provides final rules for determining the amount of interest that accrues during an accrual period and for determining the portion of a payment that consists of accrued interest. Section 1.446-2, however, does not apply to interest that is taken into account under certain other provisions of the Code and regulations, such as section 1272 and section 1.1272-1. Section 1.446-2 applies to debt instruments issued on or after April 4, 1994, and to lending transactions, sales, and exchanges that occur on or after April 4, 1994. Taxpayers, however, may rely on the regulations for debt instruments issued, or for lending transactions, sales, and exchanges that occur, on or after December 22, 1992, and before April 4, 1994. Section 1.446-2(j).

.04 Sections 1.483-1 through 1.483-3 provide final rules for the treatment of unstated interest on certain contracts for the sale or exchange of nonpublicly traded property. Sections 1.483-1 through 1.483-3 apply to sales and exchanges that occur on or after April 4, 1994. Taxpayers, however, may rely on the regulations for sales and exchanges that occur on or after December 22, 1992, and before April 4, 1994. Sections 1.483-1(f), 1.483-2(d), and 1.483-3(c).

.05 Section 1.1272-3 allows a holder of a debt instrument to elect to use a constant yield method to account for all interest that accrues on the instrument. For purposes of this election, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. A holder may make the election only for a debt instrument acquired on or after April 4, 1994. Section 1.1272-3(d) provides rules for the time and manner of making the election under section 1.1272-3.

.06 Rev. Proc. 94-29, page __, this Bulletin, permits certain taxpayers to use the principal-reduction method of accounting, which is an aggregate method of accounting for de minimis OID, including de minimis OID attributable to points. See generally section 1.1273-2(g) (concerning the effect of certain cash payments on the issue price of a debt instrument).

.07 Under section 5.03 of this revenue procedure, if a taxpayer changes its methods of accounting for OID, de minimis OID, stated interest and unstated interest, no change is made in the accounting for loans held by the taxpayer as of the "cut-off date" prescribed by this revenue procedure. Rev. Proc. 94-29 also provides that a change in method of accounting for de minimis OID, including de minimis OID attributable to points, may be made only for loans acquired on or after the cut-off date prescribed in that revenue procedure. Rev. Proc. 94-30, page , this Bulletin, provides procedures for taxpayers to change their methods of accounting for points on certain debt instruments acquired before the applicable cut-off date.

.08 Section 446(e) and section 1.446-1(e) state that, except as otherwise provided, a taxpayer must obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes.

.09 Section 1.446-1(e)(3)(i) requires that, in order to obtain the Commissioner's consent to change a method of accounting, a Form 3115, Application for Change in Accounting Method, generally must be filed within 180 days after the beginning of the taxable year in which the proposed change is to be made.

.10 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 change its method of accounting in accordance with section 446(e).

.11 When taxable income for a taxable year is computed under a method of accounting that is different from the method used to compute taxable income for the preceding taxable year, section 481(a) requires the taxpayer to take into account those adjustments necessary to prevent amounts from being duplicated or omitted.

.12 The Commissioner may determine that certain changes in methods of accounting are to be effected on a cut-off basis. If a change is made on a cut-off basis, only the items arising on or after the beginning of the year of change (or other operative date) are accounted for under the new method of accounting. Any items arising prior to that date continue to be accounted for under the former method of accounting. When a change is made on a cut-off basis, no items of income or deduction are duplicated or omitted, and, therefore, no section 481(a) adjustment is necessary. Section 2.05(3) of Rev. Proc. 92-20, 1992-1 C.B. 685, 689.

SEC. 3. SCOPE

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

(1) The taxpayer is changing its methods of accounting to comply with sections 1.163-7, 1.446-2, 1.483-1 through 1.483-3, and 1.1271-0 through 1.1275-5; and

(2) The taxpayer's year of change includes one of the potential cut-off dates listed in section 7 of this revenue procedure.

.02 This revenue procedure does not apply to a taxpayer that is seeking to change its method of accounting in reliance on the decision in Albertson's, Inc. v. Commissioner, 12 F.3d 1529 (9th Cir. 1993), rev'g 95 T.C. 415 (1990), reh'g granted, Nos. 91-70380, 91- 70381 (9th Cir. Mar. 31, 1994) (relating to the timing of the deduction for amounts credited to the account of a participant in the taxpayer's nonqualified deferred compensation plan).

SEC. 4. PROCEDURES TO OBTAIN EXPEDITIOUS CONSENT

.01 Except as provided in section 4.02 of this revenue procedure, a taxpayer that desires to change its method of accounting pursuant to this revenue procedure must attach a statement to its timely filed (including extensions) federal income tax return for the year of change. The statement must identify the cut-off date chosen by the taxpayer for purposes of the change in method of accounting.

.02 If a taxpayer desires to change its method of accounting pursuant to this revenue procedure, and if the taxpayer's federal income tax return for the year of change is filed before June 17, 1994, the taxpayer must file an amended return for the year of change no later than December 31, 1994. The taxpayer must attach a statement to the amended return identifying the cut-off date chosen by the taxpayer for purposes of the change in method of accounting. The new method must be appropriately reflected on the amended return for the year of change and on returns (or amended returns filed by December 31, 1994) for taxable years after the year of change.

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 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 granted the Commissioner's consent to make the change for debt instruments issued, or lending transactions, sales, or exchanges that occur, on or after the cut-off date. This consent is granted, however, only if the taxpayer follows the procedures in section 4 of this revenue procedure.

.03 The method of accounting for debt instruments issued before the cut-off date, or for lending transactions, sales, and exchanges that occur before the cut-off date, is not changed under this revenue procedure. Therefore, no section 481(a) adjustment is permitted or required under this revenue procedure. In addition, a taxpayer that receives consent to change its method of accounting under this revenue procedure does not thereby obtain audit protection for debt instruments issued before the cut-off date or for lending transactions, sales, or exchanges that occur before the cut-off date.

SEC. 6. EFFECT OF NON-COMPLIANCE WITH CONDITIONS

If a taxpayer to which this revenue procedure applies changes its method of accounting without following the procedures in section 4 of this revenue procedure, the taxpayer has initiated the change in method of accounting without obtaining the permission of the Commissioner required by section 446(e).

SEC. 7. DEFINITIONS

.01 Except as provided in section 7.02 of this revenue procedure, the "cut-off date" is the date chosen by the taxpayer under section 4 of this revenue procedure from among the following potential cut-off dates:

(1) December 22, 1992;

(2) The first day of any taxable year beginning after December 22, 1992, and before April 4, 1994; or

(3) April 4, 1994.

.02 If a taxpayer is changing its method of accounting for de minimis OID, including de minimis OID attributable to points, the "cut-off date" for that change is the date chosen by the taxpayer under section 4 of this revenue procedure from among the following potential cut-off dates:

(1) December 22, 1992;

(2) The first day of any taxable year beginning after December 22, 1992, and before April 4, 1994;

(3) April 4, 1994; or

(4) The first day of the taxpayer's first taxable year beginning after April 4, 1994.

.03 Except to the extent explicitly provided in this revenue procedure, the following terms have the meaning given to them by Rev. Proc. 92-20 (or its then-current successor):

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

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

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

SEC. 8. SPECIAL RULES FOR ANY CHANGE IN METHOD OF ACCOUNTING FOR DE MINIMIS OID

.01 If a taxpayer desires to change its method of accounting for de minimis OID, including de minimis OID attributable to points, the following rules apply:

(1) For years of change that include one of the cut-off dates described in section 7.02 above, this revenue procedure and Rev. Proc. 94-29 provide the exclusive procedures for a taxpayer to make the change for loans acquired at origination on or after the cut-off date. The National Office will return any Form 3115 requesting a change in method of accounting with respect to de minimis OID that was filed with the National Office before April 18, 1994, along with any user fee, and the taxpayer may use the automatic provisions of this revenue procedure to effect the change. See Rev. Proc. 94-30, which provides the exclusive procedures for a taxpayer to change its method of accounting for points on loans acquired before the applicable cut-off date.

(2) For a year of change not described in section 8.01(1) above, the taxpayer must request to make the change either under Rev. Proc. 92-20 or, if the taxpayer wants to use the principal-reduction method of accounting, under Rev. Proc. 94-29. If a taxpayer receives consent to change its method of accounting for de minimis OID under Rev. Proc. 92-20, the change will apply to debt instruments that are issued on or after April 4, 1994, and thus the section 481(a) adjustment will be computed only with respect to those instruments.

SEC. 9. EFFECTIVE DATE

This revenue procedure is effective on April 4, 1994.

DRAFTING INFORMATION

This revenue procedure was drafted in the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information, contact William E. Blanchard on (202) 622-3950 (not a toll-free call).