IRS PROVIDES PROCEDURES FOR CHANGING METHOD OF ACCOUNTING FOR AMOUNTS OWED TO RELATED FOREIGN PERSONS.

Rev. Proc. 93-13

SECTION 1. PURPOSE

This revenue procedure provides procedures for domestic taxpayers required to change their method of accounting to comply with section 267(a)(3) of the Internal Revenue Code and section 1.267(a)-3 of the Income Tax Regulations for deducting amounts owed to related foreign persons. Under this revenue procedure, qualifying taxpayers may obtain the expeditious consent of the Commissioner to change their method of accounting under section 446(e).

SEC. 2. BACKGROUND

01 Section 267(a)(2) of the Code provides generally that a taxpayer may not deduct any amount owed to a related party (as defined in section 267(b)) until it is includible in the payee's gross income. Section 267(a)(3) states that "[t]he Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person."

02 Section 1.267(a)-3 of the regulations provides generally that a taxpayer that uses a method of accounting other than that required by the rules of that section is required to change its method of accounting to conform its method to the rules of that section. Further, that section requires that a taxpayer's change in method of accounting must be made pursuant to the rules of section 446(e), the regulations thereunder, and any applicable administrative procedures prescribed by the Commissioner.

03 Notice 89-84, 1989-2 C.B. 402, states that regulations, to be issued pursuant to section 163(e)(3) and section 267(a)(2) and (a)(3) of the Code, will generally require a taxpayer to use the cash method of accounting with respect to the deduction of amounts owed to a related foreign person.

04 Section 446(e) of the Code and section 1.446-1(e)(2)(i) of the regulations state that, except as otherwise provided, a taxpayer must obtain the consent of the Commissioner in order to change a method of accounting for federal income tax purposes. Section 1.446- 1(e)(3)(i) of the regulations generally requires that in order to obtain this consent, a Form 3115, Application for Change in Accounting Method, must be filed within 180 days after the beginning of the taxable 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 a taxpayer to obtain the consent to a change in method of accounting in accordance with section 446(e).

05 Section 481(a) of the Code requires that those adjustments necessary to prevent amounts from being duplicated or omitted must be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year.

06 For Forms 3115 filed before March 23, 1992 (the date Rev. Proc. 92-20, 1992-1 C.B. 685, was published), Rev. Proc. 84-74, 1984- 2 C.B. 736, contained procedures under section 1.446-1(e) of the regulations for obtaining the consent of the Commissioner to change a method of accounting for federal income tax purposes. Guidance was provided for spreading the adjustment required by section 481(a) of the Code resulting from the change over a number of taxable years (up to 6, depending on the circumstances) to reduce the otherwise distortive effect a section 481(a) adjustment could have on income. Nevertheless, as indicated in section 2.04 of that revenue procedure, the Service believes that while the adjustment spread period is designed to reduce, at least in part, the otherwise distortive effect of the section 481(a) adjustment, certain situations exist when it is appropriate to either limit the section 481(a) adjustment period to a maximum of 3 years or to require a taxpayer to include the entire adjustment in income for the year of change.

07 Rev. Proc. 92-20 modifies and supersedes Rev. Proc. 84-74, for Forms 3115 filed on or after March 23, 1992. Section 2.04 of that revenue procedure indicates that, unless other published guidance provides terms and conditions that must be employed when making a specific type of accounting method change, a change in method of accounting will be made pursuant to the terms and conditions provided in Rev. Proc. 92-20.

SEC. 3. SCOPE

01 Except as provided in sections 3.03 and 3.04, this revenue procedure applies to any taxpayer that is changing, for its first taxable year ending on or after December 31, 1992, its method of accounting for deducting amounts owed to related foreign persons to comply with the requirements of section 267(a)(3) of the Code and section 1.267(a)-3 of the regulations.

02 This revenue procedure also applies to those taxpayers that, under the guidance provided by Notice 89-84, deferred deducting certain amounts owed to related foreign persons pursuant to the provisions of section 267(a)(3) of the Code, and under the rules in section 1.267(a)-3 of the regulations are not required to defer deducting such amounts.

03 This revenue procedure does not apply to a taxpayer that, at the time for filing the copy of the Form 3115 required under section 4 (or the original if no copy is required), is:

(1) before an appeals office or a federal court if the method of accounting for deducting amounts owed to related foreign persons is an issue under consideration; or

(2) the subject of a criminal investigation or proceeding concerning (a) directly or indirectly the taxpayer's federal tax liability for any tax year, or (b) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability for any year.

04 Any taxpayer to which this revenue procedure does not apply and that is required to change its method of accounting for deducting amounts owed to related foreign persons must file a Form 3115 with the Commissioner in accordance with the requirements of section 1.446-1(e)(3) of the regulations and Rev. Proc. 92-20. Such a change in method of accounting is a change from a Category A method of accounting as defined in section 3.06 of Rev. Proc. 92-20. Changes to which this paragraph applies include:

(1) any change in method of accounting required to comply with section 267(a)(3) of the Code and section 1.267(a)-3 for deducting amounts owed to related foreign persons made in any year after the first taxable year ending on or after December 31, 1992; and

(2) any change in method of accounting required to comply with section 163(e)(3) and section 1.163-12 relating to a deduction by the issuer of any original issue discount on a debt instrument held by a related foreign person.

SEC. 4. PROCEDURES TO OBTAIN EXPEDITIOUS CONSENT

01 EXPEDITIOUS CONSENT TO MAKE AN ACCOUNTING METHOD CHANGE.

(1) GENERAL PROCEDURES. A taxpayer required by section 267(a)(3) of the Code and section 1.267(a)-3 of the regulations to change its method of accounting for deducting amounts owed to related foreign persons is granted the Commissioner's consent to make the change for its first taxable year (year of change) ending on or after December 31, 1992, provided the taxpayer:

(a) prepares and files an original Form 3115 with its timely filed (including extensions) original federal income tax return for its first taxable year ending on or after December 31, 1992;

(b) Files a copy of the Form 3115 with the Assistant Chief Counsel (Income Tax and Accounting) no later than April 5, 1993, if the original Form 3115 (described in section 4.01(1)(a)) is not filed by that date. The copy (if necessary) should be mailed to the Commissioner of Internal Revenue, Attention: Office of the Assistant Chief Counsel (Income Tax and Accounting) CC:IT&A, P.O. Box 7604 Ben Franklin Station, Washington, D.C. 20044; and

(c) Agrees to the following terms and conditions:

(i) Beginning with the year of change, the taxpayer must take any adjustment required by section 481(a) into account ratably over six taxable years (or, if fewer, the number of years that the prior accounting method was used) in computing taxable income;

(ii) Beginning with the year of change, the taxpayer must comply with section 267(a)(3) and the regulations thereunder; and

(iii) If the taxpayer 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 section 481(a) adjustment period, the balance of the adjustment must be included in taxable income for the taxable year in which the cessation occurs.

(2) SPECIAL PROCEDURES FOR EXCESS DEFERRALS UNDER NOTICE 89-84. A taxpayer that, under the guidance provided in Notice 89-84, deferred deducting certain amounts owed to related foreign persons that it does not have to defer deducting under section 1.267(a)-3 of the regulations is granted the Commissioner's consent to change its method of accounting for its first taxable year (year of change) ending on or after December 31, 1992, provided the taxpayer:

(a) prepares and files an original Form 3115 with its timely filed (including extensions) original federal income tax return for the first taxable year ending on or after December 31, 1992; and

(b) Agrees to take the entire amount of any adjustment required under section 481(a) of the Code into account in computing taxable income in the year of change.

02 ADDITIONAL INFORMATION REQUIRED.

(1) In addition to including all the information required on the Form 3115, the taxpayer must attach to the original Form 3115 a signed written statement providing that it agrees to the terms and conditions contained in this revenue procedure.

(2) In order to assist in the processing of this change in method of accounting, reference to this revenue procedure must be made a part of the Form 3115 by either typing or legibly printing the following statement at the top of page 1 of Form 3115: "CHANGE IN METHOD OF ACCOUNTING UNDER REV. PROC. 93-13." No user fee is required for an application made under this revenue procedure.

(3) The Form 3115 and the statement described in section 4.02(1) must be signed by or on behalf of the taxpayer requesting the change by an individual with the authority to bind the taxpayer in such matters. See the signature requirements in section 10.07 of Rev. Proc. 92-20 and the General Instructions attached to the Form 3115.

(4) If the taxpayer is a member of a consolidated group, a Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. See section 10.08 of Rev. Proc. 92-20 and section 1.1502-77 of the regulations.

SEC. 5. PROTECTION FOR YEARS PRIOR TO THE YEAR OF CHANGE

If a taxpayer within the scope of this revenue procedure timely files a completed Form 3115 to change its method of accounting for deducting amounts owed to related foreign persons, and complies in all other respects with this revenue procedure, an examining agent may not require that the taxpayer change its method of accounting for an earlier taxable year.

SEC. 6. WAIVER OF THE 180-DAY REQUIREMENT

In accordance with section 1.446-1(e)(3)(ii) of the regulations, the requirement to file an application on Form 3115 within the 180- day period is waived for a method change made under this revenue procedure.

SEC. 7. COMPLIANCE WITH CONDITIONS

If a taxpayer to which this revenue procedure applies changes its method of accounting to the method prescribed in this revenue procedure without complying with all the conditions of this revenue procedure, the taxpayer will be deemed to have initiated the change in method of accounting without obtaining the permission of the Commissioner as required under section 446(e) of the Code.

SEC. 8. EFFECT OF PENDING REQUESTS FOR CONSENT

01 Unless withdrawn, requests for changes in the method of accounting for deducting amounts owed to related foreign persons that qualify under this revenue procedure will be processed according to the terms and conditions under section 4.01(1)(c) or 4.01(2)(b), whichever is applicable.

02 Taxpayers within the scope of this revenue procedure that have timely filed a Form 3115 with the National Office on or before January 5, 1993, may withdraw such application and use the automatic provisions of this revenue procedure. Any user fee submitted with the withdrawn application on Form 3115 will be returned to the taxpayer.

SEC. 9. APPLICABILITY OF REV. PROC. 92-20

The definitions of Rev. Proc. 92-20 apply to a change in method of accounting made under this revenue procedure, except to the extent otherwise provided in this revenue procedure.

SEC. 10. EFFECTIVE DATE

This revenue procedure is effective on January 5, 1993. The expeditious consent procedure provided in this revenue procedure is effective only for the taxpayer's first taxable year ending on or after December 31, 1992.

DRAFTING INFORMATION

The principal author of this revenue procedure is David L. Darick of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Darick on (202) 622-4990 (not a toll-free call).