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IRS gives some taxpayers more time to file Form 3115 & clarifies earlier ruling

Rev Proc 2015-33, 2015-24 IRB

In a Revenue Procedure, IRS has modified the procedures in Rev Proc 2015-13, 2015-5 IRB 419, issued earlier this year, that a taxpayer uses to change a method of accounting for federal income tax purposes under Code Sec. 446(e) and Reg. § 1.446-1(e). Among the more significant modifications are: (i) providing certain taxpayers affected by the final tangible property regs additional time to file Forms 3115; (ii) clarifying when the automatic change procedures do not apply if the taxpayer engages, within the requested year of change, in a transaction to which Code Sec. 381(a) applies; and (iii) clarifying the meaning of “3-month window” for a taxpayer with a 52-53 week tax year.

Background. Under Code Sec. 446(e), taxpayers must obtain IRS’s consent before changing a method of accounting for federal income tax purposes. In most cases, a taxpayer that wishes to change its method of accounting must apply and secure the prior consent of IRS. For some accounting method changes, IRS provides an automatic procedure for obtaining its consent to the change. In general, a taxpayer uses Form 3115 (Application for Change in Accounting Method) for an accounting method change.

Rev Proc 2015-13. In January of this year, IRS issued Rev Proc 2015-13, which updated and revised the general procedures under Code Sec. 446(e) and Reg. § 1.446-1(e) to obtain IRS’s consent to change a method of accounting for federal income tax purposes. Rev Proc 2015-13 included procedures for both obtaining IRS’s advance (i.e., non-automatic) consent to change a method of accounting as well as IRS’s automatic consent to certain listed changes. Rev Proc 2015-13 partially superseded Rev Proc 2011-14 (which provided procedures for obtaining IRS’s automatic consent) and superseded Rev Proc 97-27, 1997-1 CB 680 (which provided guidance on non-automatic accounting method changes). See Weekly Alert ¶  28  01/22/2015 for more details.

Modified procedures. Rev Proc 2015-33 notes a number of issues with Rev Proc 2015-13 in its current form and modifies that ruling as follows:

Transition procedures extended to account for final tangible property regs. Rev Proc 2015-13, Sec. 15.02(1)(a)(ii), provides that a taxpayer may file a Form 3115 to request IRS’s consent to change a method of accounting for a tax year ending on or after May 31, 2014, and on or before Jan. 31, 2015, until the due date of the taxpayer’s timely filed (including any extension) original federal income tax return for the requested year of change for an automatic change under the procedures of Rev Proc 2011-14, 2011-4 IRB 330 or Rev Proc 2015-13. The current provision does not allow taxpayers with tax years ending after Jan. 31, 2015, to request an automatic change under the procedures of Rev Proc 2011-14.

In September 2013 and August 2014, IRS issued Reg. § 1.162-3, Reg. § 1.162-4, Reg. § 1.263(a)-1, Reg. § 1.263(a)-2, Reg. § 1.263(a)-3 , Reg. § 1.168(i)-1, Reg. § 1.168(i)-7, and Reg. § 1.168(i)-8 (collectively, the final tangible property regs), which generally apply to tax years beginning on or after Jan. 1, 2014. Rev Proc 2015-33 extends the transition procedures of Rev Proc 2015-13, Sec. 15.02(1)(a)(ii) to all taxpayers for their first tax year in which the final tangible property regs apply, specifically by allowing a taxpayer to request an automatic change under the procedures of Rev Proc 2011-14 or Rev Proc 2015-13 for a tax year ending on or after May 31, 2014, and beginning before Jan. 1, 2015. (Rev Proc 2015-33, Sec. 3) (The location to which the Form 3115 is to be sent is also changed.)

Two changes excluded from automatic changes procedures. Rev Proc 2015-13, Sec. 5.01(1)(c) and Rev Proc 2015-13, Sec. 5.02 provide rules that limit application of the automatic change procedures in certain instances when, within the year of change, the taxpayer engages in a liquidation or reorganization transaction to which Code Sec. 381(a) (which generally governs the treatment of a transferor corporation’s earnings and profits by the transferee in certain transactions) applies. These rules are intended to provide that a taxpayer that engages in a Code Sec. 381(a) transaction within the year of change may not use the automatic change procedures to request a change to a principal method (because, as prescribed by Reg. § 1.381(c)(4)-1(d)(1) and Reg. § 1.381(c)(5)-1(d)(1), in general, an acquiring corporation does not need to secure IRS’s consent to use a principal method).

The rules in Rev Proc 2015-13, Sec. 5.01(1)(c) and Rev Proc 2015-13, Sec. 5.02 inadvertently exclude from the automatic change procedures certain changes other than a change to a principal method prescribed by Reg. § 1.381(c)(4)-1(d)(1) or Reg. § 1.381(c)(5)-1(d)(1). Accordingly, Rev Proc 2015-33, Sec. 4 modifies those sections to exclude from the automatic change procedures only changes prescribed by Reg. § 1.381(c)(4)-1(d)(1) or Reg. § 1.381(c)(5)-1(d)(1).

Application of 3-month window to taxpayers with 52-53 week year. Rev Proc 2015-13, Sec. 8 provides that, subject to exception, when a taxpayer files a timely Form 3115 under that revenue procedure, IRS won’t require the taxpayer to change its method of accounting for the same item for a tax year prior to the requested year of change (“audit protection”). One exception is for taxpayers that are under examination on the date that the Form 3115 is filed, but a taxpayer can still benefit from audit protection if the taxpayer requests a change in method of accounting for an item filed in a 3-month window if (1) the taxpayer has been under examination for at least 12 consecutive months as of the first day of the 3-month window, and (2) the method of accounting for the same item the taxpayer is requesting to change is not an “issue under consideration” (e.g., one for which the examing agent has proposed adjustments) as of the date the Form 3115 is filed.

Rev Proc 2015-13, Sec. 8.02(1)(a)(ii) provides that the 3-month window is the period beginning on the 15th day of the 7th month of the taxpayer’s tax year and ending on the 15th day of the 10th month of the taxpayer’s tax year. However, as currently written, it is unclear how this provision would apply to a taxpayer using a 52-53 week tax year (i.e., one where the taxpayer elected under Code Sec. 441(f) to, for example, have its fiscal year end each year on the last Saturday in December, producing a period that varies annually from 52 to 53 weeks). This is because the rule is not expressed in terms of a tax year beginning, including, or ending with reference to the first or last day of a specified calendar month, as provided in Reg. § 1.441-2(c)(1). Accordingly, Rev Proc 2015-33, Sec. 5 modifies Rev Proc 2015-13, Sec. 8.02(1)(a)(ii) to provide that, for determining the 3-month window, the tax year begins on the first day of the calendar month nearest to the first day of the 52-53 week tax year.

Effective date. Rev Proc 2015-33 is effective for Forms 3115 filed on or after Jan. 16, 2015, for a year of change ending on or after May 31, 2014.

References: For accounting method changes, see FTC 2d/FIN ¶  G-2100  et seq.; United States Tax Reporter ¶  4464.21; TaxDesk ¶  442,400  et seq.; TG ¶  6300  et seq.