SERVICE ANNOUNCES GUIDELINES FOR CHANGING METHOD OF ACCOUNTING FOR INCREASE IN INTEREST ON SERIES E OR EE U.S. SAVINGS BONDS.

Rev. Proc. 89-46

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide a procedure for certain cash basis taxpayers to obtain expeditious consent to change their method of reporting the increase in the redemption value (interest) of Series E or EE U.S. savings bonds for federal income tax purposes. Taxpayers complying with this revenue procedure will be deemed to have obtained the consent of the Commissioner to change their method of reporting this income.

SEC. 2. BACKGROUND

Section 454 of the Internal Revenue Code and section 1.454-1(a) of the Income Tax Regulations provide that if the increase in the redemption price of certain non-interest bearing obligations issued at a discount does not constitute income for such year under the cash method of accounting used by the taxpayer in computing taxable income, the taxpayer may elect to treat such increase as constituting income for the year in which such increase occurs. (For this purpose non-interest bearing obligations include Series E or EE U.S. savings bonds.) Any such election under section 454 must be made in the taxpayer's return and may be made for any tax year. The election price made is binding upon the taxpayer with respect to all such obligations, unless the Commissioner permits the taxpayer to change to a different method of reporting income from such obligations pursuant to section 446.

Section 446(e) of the Code and section 1.446-1(e) of the regulations state that, except as otherwise provided, in order to change a method of accounting for federal income tax purposes, a taxpayer must obtain the consent of the Commissioner. Section 1.446- 1(e)(3)(i) requires that in order to obtain this consent, a Form 3115, Application for Change in Accounting Method, must generally be filed within 180 days after the beginning of the tax year in which the proposed change is 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 taxpayers to obtain consent to change their method of accounting in accordance with section 446(e).

SEC. 3. SCOPE AND OBJECTIVE

This revenue procedure applies to taxpayers who own Series E or EE U.S. savings bonds, have elected under section 454 of the Code to report as income the increase in redemption price occurring in a tax year, and now wish to change their method of accounting to report such income in the taxable year in which the obligation is redeemed, disposed of, or finally matures, whichever is earlier.

A taxpayer shall not be permitted to change its method of accounting pursuant to this revenue procedure during the 5-year period following the year for which a change is made pursuant to this revenue procedure.

SEC. 4. APPLICATION

In accordance with section 1.446-1(e)(3)(ii) of the regulations, the 180-day rule is waived for purposes of this revenue procedure for tax years beginning on or after January 4, 1989. Further, under section 1.446-1(e)(2)(i), consent is hereby granted to a taxpayer within the scope of this revenue procedure to change from a method of reporting as income the annual increase in the redemption price of Series E or EE U.S. savings bonds issued at a discount to a method of reporting such increases in the year in which they are realized by disposition, redemption, or upon final maturity, whichever is earlier. This consent is granted for the tax year for which a taxpayer requests a change (year of change) by filing a current form 3115 in the manner described in section 5 of this revenue procedure and by otherwise complying with the provisions of this revenue procedure.

SEC. 5. MANNER OF EFFECTING THE CHANGE

A taxpayer applying for a change in method of accounting pursuant to this revenue procedure must complete a current Form 3115 and attach it to the taxpayer's federal income tax return for the year of change. The Form 3115 must be attached to a return filed on or before the due date (including extensions), except in the case of certain taxpayers described in section 6 changing their method for 1988. The taxpayer must identify the Series E or EE U.S. savings bonds for which this change in accounting method is requested. No user fee is required for an application filed under this revenue procedure.

In order to assist in the processing of the change in accounting method and to ensure proper handling, reference to this revenue procedure shall be made a part of the Form 3115 by either typing or legibly printing the following statement at the top of page 1 of the Form 3115 "FILED UNDER REV. PROC. 89-46".

The consent to make this change is hereby granted, provided the taxpayer attaches to the completed Form 3115 statements to the following effect:

(1) The taxpayer agrees to report all interest on the obligations acquired during the year of change and for all subsequent tax years when the interest is realized upon disposition, redemption, or final maturity, whichever is earlier; and

(2) The taxpayer agrees to report all interest on the obligations acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earlier, with the exception of any interest income previously reported in prior tax years.

No adjustment under section 481 of the Code is to be taken into account with respect to this change.

The signature of the person requesting the change in method of accounting must appear in the space provided for it on the Form 3115. See the signature requirements set forth in the General Instructions attached to a current Form 3115 for those who are authorized to sign Form 3115. A parent may sign on behalf of a minor child. If an agent is authorized to represent the taxpayer before the Service, to receive the original or a copy of correspondence concerning the request, or to perform any other act(s) regarding the application on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to the application. A taxpayer's representative without a power of attorney to represent the taxpayer as indicated in this subsection will not be given any information about the application.

SEC. 6. EFFECTIVE DATE

This revenue procedure shall be effective for tax years ending after December 30, 1988. However, to take advantage of this revenue procedure for 1988 calendar tax years, taxpayers must have timely filed (i.e. filed within the first 180 days of 1988) a Form 3115 with the National Office of the Internal Revenue Service for 1988. Any taxpayer that has timely field a Form 3115 for 1988 may effect a change in method for such year by timely filing an original return, or by filing an amended return, for 1988, and attaching to such return a copy of the Form 3115, including the statments described in section 5.03 and a reference to this revenue procedure, as described in section 5.02.

SEC. 7. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: CC:IT&A, 1111 Constitution Avenue, N.W., Washington, D.C. 20224

DRAFTING INFORMATION

The principal author of this revenue procedure is Joseph Donnelly of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Joseph Donnelly on (202 566-6803) (not a toll-free call).