Rev. Proc. 64-16

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to set forth an administrative procedure under which a taxpayer may be permitted to change his accounting practice for Federal tax purposes with respect to any item of income or expense to an acceptable treatment of such item consistent with the Income Tax Regulations. Under this procedure, the question whether or not the changed accounting practice constitutes a change of "method of accounting" within the meaning of the term as used in sections 446 and 481 of the Internal Revenue Code of 1954 will not be raised, considered, or conceded by either the taxpayer or the Internal Revenue Service.

SEC. 2. BACKGROUND AND GENERAL INFORMATION.

.01 The Service has received numerous inquiries whether certain types of changes in accounting practices constitute "changes in method of accounting" within the meaning of that term as used in sections 446 and 481 of the Code. Because of the inherent difficulties in making such determinations in certain areas, for example, where materiality of the item is a pertinent factor, clear and concise guidelines so necessary in the administration of this important phase of tax law have not as yet been established. The Service recognizes that many taxpayers would like to change their accounting practices to comply with recognized accounting principles consistent with the regulations, but are reluctant to request permission for such a change because of their inability to determine in advance the tax effects of such a change.

.02 Although a high priority has been assigned to the resolution of these problems, the Service is not now able to predict when adequate specific guidelines can be developed and adopted.

.03 In processing applications for change in "method of accounting" under sections 446 and 481 of the Code, the Service, after studying the facts involved, has been able to reach reasonable agreements resolving most problems encountered in a manner satisfactory to both the taxpayers and the Service. Under these agreements necessary adjustments are allocated over a 10-year period in order to smooth out the income effect and eliminate distortions in taxable income which might otherwise arise as a result of the change. The Service feels that there are many taxpayers who would like to change certain accounting practices and who would welcome an opportunity to make a similar arrangement under which the change could be effected.

SEC. 3. SCOPE AND OBJECTIVE.

.01 Pending promulgation of specific guidelines as to what constitutes a change in "method of accounting," the Service has adopted an administrative procedure under which a taxpayer's request to change his accounting practice for tax purposes with respect to particular items of income or expense to an acceptable treatment of such items consistent with the regulations will receive favorable consideration, provided he proposes and agrees as a condition to the change to take the necessary resulting adjustment into account ratably over a 10-year period.

.02 This procedure will ordinarily be applicable to a taxpayer's first taxable year for which a return has not been filed at the time of the request and shall be referred to for this purpose as the "year of transition." The 10-year period for allocating the resulting adjustment shall begin with the year of transition.

SEC. 4. APPLICATION.

.01 Any taxpayer wishing to take advantage of this administrative procedure to effect a change should address a letter to the Commissioner of Internal Revenue, Attention:T:R:C, Washington, D.C., 20224, and request application of the administrative procedure under Revenue Procedure 64-16. In addition, the letter should furnish (1) present over-all method of accounting, (2) the accounting practice presently employed for the item(s) in question and the accounting practice desired to be employed for such item(s), as well as the amount and nature of the adjustment(s) involved in changing the item(s), (3) whether or not an issue regarding taxpayer's accounting procedures is involved in a return presently under examination by the District Director, and (4) a statement that the taxpayer proposes to take the adjustment into account over a 10-year period and will enter into a written collateral agreement with the Service to this effect.

.02 In the event a taxpayer's return is being examined by the Service and there is an issue involved concerning a change in accounting practice with respect to any item in order to conform to recognized accounting principles consistent with the regulations, the taxpayer may request application of the administrative procedure set forth herein. In such event, this procedure will generally be applicable to the most recent taxable year (year of transition) for which an income tax return has been filed. Such request should be made by submitting a letter, as outlined above, to the Commissioner of Internal Revenue through the District Director for the Internal Revenue district in which the return is being examined. Pending completion of action by the National Office on the request for application of the administrative procedure, the District Director will suspend audit on this particular issue.

SEC. 5. CONFERENCE IN THE NATIONAL OFFICE.

If after requesting application of this administrative procedure the taxpayer desires to discuss the matter in the National Office, a conference will be arranged upon request.

SEC. 6. AREAS NOT COVERED BY THIS PROCEDURE.

This procedure will not apply to applications for changes (1) in an overall method of accounting (e.g. cash to accrual), (2) from specific charge-off to the reserve method of treating bad debts, (3) in inventory methods from LIFO to FIFO, (4) from farm price and from unit-livestock-price, nor (5) in a method of depreciation. Such applications are ordinarily filed on Form 3115, Application for Change in Accounting Method, under the provisions of section 1.446-1(e) of the regulations.

SEC. 7. INQUIRIES.

Inquiries in regard to this Revenue Procedure should refer to its number and be addressed to the Commissioner of Internal Revenue, Attention: T:R:C, Washington, D.C., 20224.

¹ Also released as Technical Information Release 547, dated Feb. 11, 1964.