SERVICE ISSUES PROCEDURES FOR EXPEDITIOUS APPROVAL OF CHANGES IN THE MANNER USED TO REPORT INCOME FROM SALES ON THE INSTALLMENT PLAN.

Rev. Proc. 87-29

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide a procedure by which taxpayers who have been reporting income from sales on the installment plan in a manner inconsistent with Rev. Rul. 87-48, page * * *, this Bulletin, may obtain expeditious consent to change from such method of reporting income to a permissible method. Taxpayers complying with this revenue procedure will be deemed to have obtained the consent of the Commissioner to change their method of accounting.

SEC. 2 BACKGROUND

01 Section 453A(a)(1) of the Code provides that, under regulations prescribed by the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may report income from sales on the installment method. Section 1.453-2(b) of the Income Tax Regulations defines "sale on the installment plan" for dealers in personal property as:

(1) A sale of personal property by the taxpayer under any plan for the sale or other disposition of personal property which plan, by its terms and conditions, contemplates that each sale under the plan will be paid for in two or more payments, or

(2) A sale of personal property by the taxpayer under any plan for the sale or other disposition of personal property --

(i) Which plan, by its terms and conditions, contemplates that such sale will be paid for in two or more payments, and

(ii) Which sale is in fact paid for in two or more payments.

02 Rev. Rul. 87-48, which applies to tax years beginning on or after June 22, 1987, provides that not all sales by a dealer under a plan qualify for treatment as sales on the installment plan under section 1.453-2(b)(1) of the regulations unless the dealer reasonably expects that, in general, customers will pay for sales in two or more payments. Therefore, if a taxpayer is reporting on the installment method income from sales that are made under a plan but, pursuant to Rev. Rul. 87-48, that method of reporting is not proper because the plan does not qualify under section 1.453-2(b)(1), then the taxpayer must change to a permissible method of reporting income from such sales.

03 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) generally provides that in order to obtain this consent, a taxpayer must file an application on Form 3115, Application for Change in Accounting Method, 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).

04 Section 481(a) of the Code provides that if a taxpayer's taxable income for any tax year is computed under a method of accounting different from the method used to compute taxable income for the preceding tax year, then the taxpayer must take into account those adjustments necessary to prevent amounts from being duplicated or omitted by reason of such change in method. 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.

SEC. 3. SCOPE

01 Except as provided in section 3.02 below, this revenue procedure applies only to taxpayers who are reporting income from sales on the installment plan in a manner inconsistent with Rev. Rul. 87-48 and who change to a permissible method.

02 This revenue procedure does not apply to a taxpayer if:

(1)(a) The tax year for which the taxpayer requests a change (year of change) by filing a Form 3115 in the manner described in section 6.01 is a year other than the taxpayer's first tax year that begins on or after June 22, 1987, and

(b) On or before the date that the first copy of Form 3115 required by section 6.01 is filed, the taxpayer has been contacted in any manner by a representative of the Service for the purpose of scheduling an examination of the taxpayer's federal income tax return for any year and such examination has not been completed; or

(2) On the date that the first copy of Form 3115 required by section 6.01 is filed, the taxpayer is:

(a) Before an appeals office of the Service with respect to an examination of the taxpayer's federal income tax returns(s) for any year, unless (i) the taxpayer has obtained an agreement from the appeals officer that there is no objection to the proposed change in method of accounting, or (ii) the Service has not raised the issue whether the method of reporting income from sales is inconsistent with Rev. Rul. 87-48;

(b) Before any federal court with respect to an income tax issue arising in any year, 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; or

(c) Subject of a criminal investigation or proceeding concerning, directly or indirectly, (i) the taxpayer's federal tax liability for any year, or (ii) the possibility of a false or fraudulent statement made by the taxpayer with respect to its federal tax liability for any year.

03 Taxpayers to whom this revenue procedure does not apply and who desire to change their method of accounting must comply with the requirements of section 1.446-1(e)(3) of the regulations and Rev. Proc. 84-74, 1984-2 C.B. 736.

SEC. 4. APPLICATION

01 CONSENT. In accordance with section 1.446-1(e)(3)(ii) of the regulations, the 180-day rule is waived, and under section 1.446- 1(e)(2)(i), consent is hereby granted to a taxpayer to change from a method of reporting income from sales on the installment plan in a manner inconsistent with Rev. Rul. 87-48 to a permissible method, provided the taxpayer complies with the provisions and conditions of this revenue procedure. See section 5 regarding compliance with conditions of this revenue procedure. 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 6 of this revenue procedure.

02 SECTION 481(a) ADJUSTMENT. Section 481 of the Code prescribes the rules to be followed in computing taxable income in cases in which the taxable income of taxpayer is computed under a method of accounting different from the method used to compute the taxable income for the preceding tax year. An adjustment, referred to as a "section 481(a) adjustment," is required to prevent items from being duplicated or omitted when a change in method of accounting is made. The "section 481(a) adjustment" shall be taken into account in computing taxable income in the manner provided in section 4.03 below. The section 481(a) adjustment generally will not be taken into account in computing corporate earnings and profits because section 312(n)(5) provides that for sales occurring after September 30, 1984, earnings and profits are computed as if the corporation did not use the installment method. The change in method of accounting shall be considered to be a change in method of accounting initiated by the taxpayer.

03 SECTION 481 ADJUSTMENT PERIOD. (1) The appropriate period ("adjustment period") for taking into account the section 481(a) adjustment referred to in section 4.02 is to be determined as follows:

(a) For the 2 tax years beginning after June 22, 1987, the date of publication of Rev. Rul. 87-48 in the Internal Revenue Bulletin, the taxpayer will be given an adjustment period determined in accordance with subdivisions (i), (ii), and (iii) below.

(i) When the entire amount of the adjustment is attributable to the tax year immediately preceding the year of change (first preceding year), the total adjustment is to be taken into account in computing taxable income for the year of change. The amount attributable to the tax 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 the preceding year.

(ii) When subdivision (i) of this section 4.03(1)(a) does not apply and 67 percent or more of the amount of the adjustment is attributable to the 1-tax year period, 2-tax year period, or 3-tax year period immediately preceding the year of change, the highest percent attributable to the 1, 2, or 3-tax year period is to be taken into account ratably over a 3-tax 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 tax years the taxpayer has used the method of accounting that is being change. However, the total adjustment period shall not exceed 6 tax years. This section 4.03(1)(a)(ii) only applies if the taxpayer has used the method being changed for more than 3 tax years. If the method of accounting being changed has been used for no more than 4 tax years, 75 percent shall be substituted for 67 percent. An amount attributable to the 1, 2, or 3-tax year period is the difference in the amount of 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 the preceding 1, 2, or 3-tax year period.

(iii) When neither subdivision (i) nor (ii) of this section 4.03(1)(a) applies, the total adjustment is to be taken into account ratably over the number of tax years (not to exceed 6) the taxpayer has used the method of accounting that is being changed.

(b) When subparagraph (a) of this section 4.03(1) does not apply and the entire amount of an adjustment is attributable to the tax year immediately preceding the year of change, the total adjustment is to be taken into account in computing taxable income for the year of change. The amount attributable to the tax 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 for such preceding year.

(c) When neither subparagraph (a) nor (b) of this section 4.03(1) applies, the total adjustment is to be taken into account ratably over the number of tax years (not to exceed 3) the taxpayer has used the method of accounting that is being changed.

(2) In applying section 4.03(1), 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-tax year period immediately preceding the year to change, the taxpayer may reasonably estimate these amounts and attach the computations upon which the estimates are based to the Form 3115. In addition, the taxpayer must sign and attach to the Form 3115 the following statement:

Under penalties of perjury, I hereby certify that:

(a) The books and records of [name and taxpayer] do not contain sufficient information to permit a computation of the section 481(a) adjustment attributable to the 1-tax year period, 2-tax years period, or 3-tax year period immediately preceding the year of change as required by section 4.03(1) of Rev. Proc. 87-29.

(b) Based on the information that is contained in such records, to the best of my knowledge 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 tax 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-tax year period immediately preceding the year of change.

(3) For examples of the application of the rules prescribed in section 4.03(1) with respect to the appropriate period for taking into account the section 481(a) adjustment, see examples in section 5.14 of Rev. Proc. 84-74.

04 CEASING TO ENGAGE IN THE TRADE OR BUSINESS.

(1) With respect to a corporation:

If the corporation ceases to engage in the trade or business to which the section 481(a) adjustment relates at any time prior to the expiration of the adjustment period referred to in section 4.03, the balance of the adjustment not previously taken into account in computing taxable income shall be taken into account in the year of cessation. 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 portion of the section 481(a) adjustment applicable to the business conducted by that division of the corporation must be taken into account in computing taxable 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 operation of the trade or business if its assets have been acquired by another corporation in 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 the partnership terminates (within the meaning of section 708(b) of the Code) or ceases to engage in the trade or business to which the section 481(a) adjustment relates at any time prior to the expiration of the adjustment period referred to in section 4.03, the balance of the adjustment not previously taken into account in computing taxable income shall be taken into account in the year of termination or the year of cessation, whichever is applicable. A partnership ceases to engage in a trade or business if the partnership incorporates the trade or business in a transaction to which section 351 of the Code applies (see Rev. Rul. 85-134, 1985-2 C.B. 160).

(3) With respect to a sole proprietor:

If the individual (sole proprietor) ceases to engage in the trade or business to which the section 481(a) adjustment relates at any time prior to the expiration of the adjustment period referred to in section 4.03, the balance of the adjustment not previously taken into account in computing taxable income shall be taken into account in the year of cessation. A sole proprietor ceases to engage in a trade or business if the sole proprietor incorporates the trade or business in a transaction to which section 351 of the Code applies (see Rev. Rul. 77-264, 1977-2 C.B. 187). A sole proprietor does not cease to engage in a trade or business if the sole proprietor sells a partial interest in the trade or business and continues to be actively engaged in the management of the trade or business that is subsequently operated as a partnership. The section 481(a) adjustment remaining at the time the partnership is formed is to be taken into account by the sole proprietor in computing his own taxable income as though there had been no change in ownership (see Rev. Rul. 66-206, 1966-2 C.B. 206).

SEC. 5. COMPLIANCE WITH CONDITIONS

Taxpayers making a change form a method of reporting income from sales on the installment plan in a manner inconsistent with Rev. Rul. 87-48 to a permissible method without complying with all the conditions of this revenue procedure will be deemed to have made a change in method of accounting without obtaining the consent of the Commissioner as required under section 446(e) of the Code.

SEC. 6. MANNER OF EFFECTING THE CHANGE

01 A taxpayer applying for a change in method of accounting pursuant to this revenue procedure must complete and file a current Form 3115 in duplicate. The original shall be attached to the taxpayer's timely filed federal income tax return for the year of change. A copy of the Form 3115 shall be filed with the National Office addressed to the Commissioner of Internal Revenue, Attention: CC:C:1, 1111 Constitution Avenue, N.W., Washington, D.C. 20224, no later than 270 days after the beginning of the year of change. In addition to including all of the information required on the Form 3115, the taxpayer must: (1) state that it agrees to all of the conditions of Rev. Proc. 87-29 and proposes to take the section 481(a) adjustment into account over the appropriate period required by section 4.03; and (2) indicate the period over which the section 481(a) adjustment will be taken into account and the basis for such conclusion. If it is found that the taxpayer does not qualify for the change in method of accounting under this revenue procedure, the National Office or the district director will so advise the taxpayer.

02 In order to assist in the processing of these changes in method of accounting and to insure property handling, reference to this revenue procedure shall be made a part of the Form 3115 by either typing or legibily printing the following statement at the top of page 1 of Form 3115: "FILED UNDER REV. PROC. 87-29."

03 The signature of the person requesting the change in method of accounting must appear in the space provided for it on the Form 3115. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a partnership and a trustee on behalf of a trust. See the signature requirements set forth in the General Instructions attached to a current Form 3115 for those who are to sign. 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. Taxpayer's representatives without a power of attorney to represent the taxpayer as indicated in this subsection will not be given any information about the application.

04 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.

SEC. 7. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commission of Internal Revenue, Attention: CC:C:4, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SEC. 8. EFFECTIVE DATE

This revenue procedure is effective June 22, 1987, the date of its publication in the Internal Revenue Bulletin. Requests for change in methods that qualify under this revenue procedure and are received in the National Office after the effective date will be returned to the taxpayer. Taxpayers who have timely filed a Form 3115 with the National Office prior to the effective date of this revenue procedure may use the automatic provisions of this revenue procedure and will be notified to this effect by the National Office.