SERVICE TELLS BANKS HOW TO OBTAIN EXPEDITED CONSENT TO CHANGE METHOD OF REPORTING INCOME ON SHORT-TERM CUSTOMER LOANS.

Rev. Proc. 90-37

SECTION 1. PURPOSE

This revenue procedure provides that certain taxpayers may obtain expeditious consent to change their accounting method for reporting interest income on short-term loans to customers to accord with the provisions of section 1281 of the Internal Revenue Code. As used in this revenue procedure, the term "interest income" includes stated interest, original issue discount, and acquisition discount. A taxpayer that complies with this revenue procedure will be deemed to have obtained the consent of the Commissioner to change its accounting method.

SEC. 2. BACKGROUND

01 In general, section 1281(a) of the Code, as modified by section 1283(c)(1), requires a holder of certain short-term obligations, including a bank as defined in section 581, to include in gross income any accrued interest income on such obligations, regardless of the holder's overall method of accounting. Section 1281(a) applies to all types of interest income, including acquisition discount, original issue discount, and stated interest. S. Rep. No. 99-313, 99th Cong., 2d Sess. 903 (1986), 1986-3 (Vol. 3) C.B. 903.

02 Section 1283(a)(1) of the Code generally defines a short-term obligation as any bond, debenture, note, certificate, or other evidence of indebtedness that matures in one year or less from its issue date. A short-term loan is a short-term obligation.

03 Section 1281(a) of the Code, by its terms, requires only the inclusion of acquisition discount. It is modified by section 1283(c) of the Code, however, to require the inclusion of original issue discount (rather than acquisition discount) on short-term nongovernmental obligations. See section 1273(a)(1) for the definition of original issue discount and section 1283(a)(2) for the definition of acquisition discount.

04 Under sections 1281(a) and 1283(c) of the Code, the holder of a short-term obligation subject to section 1281 must include in gross income an amount equal to the sum of the daily portions of the acquisition discount or original issue discount, whichever is applicable, on the obligation for each day during the tax year that the obligation is held by the holder. See section 1283(b), as modified by section 1283(c), for the determination of the daily portion of the acquisition discount or original issue discount on a short-term obligation. In addition, section 1281(a) requires the holder of any short-term obligation subject to section 1281 to include in gross income any interest that is payable on the obligation (other than interest taken into account in determining the amount of the acquisition discount or original issue discount) as it accrues.

05 Section 446(e) of the Code and section 1.446-1(e) of the Income Tax Regulations provide 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 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 a taxpayer to obtain consent to a change in its method of accounting in accordance with section 446(e) of the Code.

06 Section 481(a) of the Code requires that those adjustments necessary to prevent amounts from being duplicated or omitted 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 tax year. 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.

07 Rev. Proc. 84-74, 1984-2 C.B. 736, contains procedures under section 1.446-1(e) of the regulations for obtaining the consent of the Commissioner to a change in a method of accounting for federal income tax purposes. Section 5.15 of the revenue procedure states, in part, that the Commissioner will impose terms and conditions when consenting to changes in methods of accounting to make certain that taxable income is or will be clearly reflected, and to prevent taxpayers from receiving otherwise unavailable benefits that could arise from a change in method of accounting. Although Rev. Proc. 84- 74 also specifies procedures for spreading an adjustment required by section 481(a) of the Code resulting from a change in method of accounting over a number of tax years to ameliorate the otherwise distortive effect of such adjustment, section 2.04 of that revenue procedure provides that, in order to further compliance with proper methods of accounting, certain situations exist when allowing a section 481 adjustment period of more than one tax year is not appropriate.

SEC. 3. SCOPE

01 Except as provided in section 3.02 below, this revenue procedure applies to a taxpayer described in this subsection that desires to effect a change in method of accounting to comply with section 1281 of the Code for interest income on short-term loans to its customers. A taxpayer is described in this subsection if it satisfies two conditions:

1. The taxpayer is a bank (as that term is defined in section 581 of the Code, which definition includes most thrift institutions); and

2. The taxpayer's present method of accounting is in compliance with section 1281 for all of the taxpayer's short- term obligations described in section 1281(b)(1) other than short-term loans to its customers.

02 This revenue procedure does not apply to:

(1) Any bank that, as of the date of the filing of the Form 3115 with the National Office, has been contacted in any manner by a representative of the Internal Revenue Service for the purpose of scheduling an examination of its federal income tax return(s) for any year, if the examination has not been completed, unless the bank has obtained and attaches to its Form 3115 an agreement from the revenue agent that there is no objection to the proposed change in method of accounting.

(2) Any bank that, as of the date of the filing of the Form 3115 with the National Office, is:

(a) Before an appeals office of the Service with respect to an examination of its federal income tax return(s) for any year, unless the bank has obtained and attaches to its Form 3115 an agreement from the appeals officer that there is no objection to the proposed change in method of accounting; or

(b) Before any federal court with respect to an income tax issue arising in any year, unless the bank has obtained an agreement from counsel for the government that there is no objection to the proposed change in method of accounting.

(3) Any bank that, as of the date of the filing of the Form 3115 with the National Office, is the subject of a criminal investigation or proceeding concerning (a) directly or indirectly the bank's federal income tax liability for any year, or (b) the possibility of false or fraudulent statements made by the bank with respect to any issue relating to its federal income tax liability for any year.

03 Any taxpayer to which this revenue procedure does not apply must file a current Form 3115 with the Commissioner in accordance with the requirements of section 1.446-1(e)(3) of the regulations and Rev. Proc. 84-74 in order to secure the consent of the Commissioner to change the taxpayer's method of accounting for reporting interest income on short-term obligations to the method required by section 1281 of the Code.

SEC. 4. APPLICATION

01 CONSENT. In accordance with section 1.446-1(e)(3)(ii) of the regulations, the requirement to file an application on Form 3115 within a 180-day period is waived, and under section 1.446-1(e)(2)(i) consent is hereby granted to any taxpayer to which this revenue procedure applies to change its method of accounting for reporting interest income on short-term obligations to the method required by section 1281 of the Code. This consent is granted for the tax year for which the taxpayer requests a change (year of change) by filing a current Form 3110 in the manner described in section 6 of this revenue procedure and by otherwise complying with the provisions of this revenue procedure. See section 5 regarding compliance with the provisions of this revenue procedure. If a taxpayer to which this revenue procedure applies changes its method of accounting for reporting interest income on short-term obligations to the method required by section 1281 of the Code without complying with all the provisions 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.

02 SECTION 481(a) ADJUSTMENT AND ADJUSTMENT PERIOD. Section 481 of the Code prescribes the rules to be followed in computing taxable income of a taxpayer in cases where the taxable income of a taxpayer is computed under a method of accounting different from the method used to compute taxable income for the preceding year. An adjustment is required to prevent amounts from being duplicated or omitted when a change in method of accounting is made. The Service has determined that an adjustment period of one year for a positive section 481(a) adjustment (increase in income) is appropriate in situations in which taxpayers are requesting permission to change to the method of accruing interest income on short-term loans to customers in accordance with the provisions of section 1281. Accordingly, the positive section 481(a) adjustment will be taken into account entirely in the year of change.

03 Taxpayers to which this revenue procedure applies may not use Rev. Proc. 84-74 but must use the provisions of this revenue procedure to change their method of accounting for reporting interest income on short-term obligations to the method required by section 1281 of the Code.

SEC. 5. 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 (determined with regard to extensions) federal income tax return for the year of change. The copy shall be filed with the National Office of the Internal Revenue Service, CC:IT&A:8, P.O. Box 7616, Benjamin Franklin Station, Washington, D.C. 20044, by the later of 270 days after the beginning of the year of change, or August 31, 1990 (60 days after publication of this revenue procedure). In addition to including all information required on the Form 3115, the taxpayer shall indicate that it will take the entire section 481(a) adjustment into account in the year of change. No user fee is required for an application filed under this revenue procedure.

02 In order to assist in the processing of these changes in method of accounting and to insure 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 Form 3115: "FILED UNDER REV. PROC. 90-37."

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. See the signature requirements set forth in the General Instructions attached to a current Form 3115 for those who are authorized to sign. If an agent is authorized to represent the taxpayer before the Service, to receive the original or copy of correspondence concerning the request, or to perform any additional 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.

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. 6. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: CC:IT&A:8, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SEC. 7. EFFECTIVE DATE

This revenue procedure is effective July 2, 1990, the date of its publication. Any request for a change in method of accounting to which this revenue procedure applies that is received by the National Office after the effective date will be returned to the taxpayer. Taxpayers who have already filed a timely 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 so notified to this effect by the National Office.

DRAFTING INFORMATION

The principal author of this revenue procedure is Wendy MacDonald of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Dan McCubbin on (202) 566-3501 (not a toll-free call).