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Consent of Director Provisions for a Voluntary Change in Method of Accounting under Rev. Proc. 2011-14, APPENDIX Section 15.11

LB&I Control No: LB&I-4-1111-018
Impacted IRM 4.51.2

November 9, 2011

MEMORANDUM FOR INDUSTRY DIRECTORS
DIRECTOR, FIELD SPECIALISTS
DIRECTOR, INTERNATIONAL BUSINESS COMPLIANCE
FROM: Lavena B. Williams   /s/ Lavena B. Williams
Acting Director, Pre-Filing and Technical Guidance
 SUBJECT:  Consent of Director Provisions for a Voluntary Change in Method of Accounting under Rev. Proc. 2011-14, APPENDIX Section 15.11

Introduction

This memorandum provides direction to the field in the examination of any taxpayer- initiated Change in Accounting Method implemented pursuant to Rev. Proc. 2011-14, APPENDIX § 15.11, Advance payments – change in applicable financial statements (AFS), also identified as “Designated Change No. 153.”

Background

Advance payments for services or a combination of goods and services may be deferred for a limited time pursuant to Rev. Proc. 2004-34.  A proper deferral method under that procedure requires “book/tax conformity” in the year of receipt, such that a taxpayer may only defer for tax what is deferred in accordance with its AFS in the year of receipt. 

Since publication of Rev. Proc. 2004-34, uncertainty arose regarding whether the taxpayer was required to obtain consent of the Commissioner under IRC § 446(e) when a taxpayer (1) used a proper deferral method under Rev. Proc. 2004-34; (2) changed the period over which the advance payment was deferred for its AFS; and (3) wanted to change the tax deferral period to be consistent with the AFS deferral as required to stay on a proper deferral method under the revenue procedure.  

The Service addressed this uncertainty in Rev. Proc. 2011-14, APPENDIX § 15.11.  Section 15.11(4)(c)(i) of the APPENDIX explains that under § 446(e), a taxpayer that changes its book method of accounting must secure the Commissioner’s consent before applying its new book method of accounting for tax purposes.  See also § 1.446-1(e)(2)(i).  Accordingly, a taxpayer that previously adopted a deferral method for advance payments under Rev. Proc. 2004-34 is required to obtain consent of the Commissioner under § 446(e) if the taxpayer subsequently changes its book method for the deferred advance payments and wants to use its new AFS in determining the extent to which advance payments are included in gross income under Rev. Proc. 2004-34.

Analysis

Rev. Proc. 2011-14 APPENDIX § 15.11(2)(b) authorizes a taxpayer to file a statement in lieu of a Form 3115.  Such statement is deemed an application if it satisfies the requirements of § 15.11(2)(b).  The Service recognizes that because taxpayers are not required to file a duplicate copy of the application with either the National Office or the Ogden office, some taxpayers may have interpreted the scope requirements of section 4.02(1) of Rev. Proc. 2011-14 as not applying to the new automatic consent provision.  As a result, those taxpayers changed their method of accounting under APPENDIX § 15.11 without obtaining Consent of Director.

Generally, a taxpayer under examination and not in either a 90-day or 120-day window, must obtain Consent of Director to be within the scope of the automatic consent procedure.  See Rev. Proc. 2011-14, § 6.03.  The Director will consent to the filing of an application to change from a clearly permissible method of accounting.  Because § 15.11 of the APPENDIX applies only to taxpayers already properly deferring income under Rev. Proc. 2004-34, Consent of Director will be provided in every case where a taxpayer meets the requirements of § 15.11(1).

Since the taxpayer who meets the requirements of APPENDIX § 15.11 will need to obtain “Consent of Director” to implement the change, we are concerned about inefficient use of Exam resources and increased taxpayer burden for taxpayers intending to use the new automatic consent method change while under examination.

Planning and Examination Guidance

During the examination of a taxpayer’s federal tax return filed for its first or second tax year ending after April 29, 2010, an examiner will not assert that the taxpayer’s present method of accounting for advance payments is not a proper deferral method described in section 5.02(3)(a) of Rev. Proc. 2004-34 solely on the grounds that the taxpayer failed to obtain the Consent of Director on the date the taxpayer filed the application pursuant to Rev. Proc. 2011-14, APPENDIX § 15.11 for a change in method of accounting if the taxpayer:

(1) received advance payments, as defined in Rev. Proc. 2004-34;

(2) used the deferral method described in § 5.02(3)(a) of Rev. Proc. 2004-34 for including those advance payments in gross income in accordance with its AFS;

(3) changed the manner in which advance payments are recognized in revenues in its AFS;

(4) changed its method of accounting for deferring advance payments in accordance with the requirements of § 15.11 of the APPENDIX except that it did not obtain the Consent of Director as required under § 6.03(4) of Rev. Proc. 2011-14; and

(5) used its new AFS method with respect to a timely filed original federal income tax return in determining the amount of advance payments included in gross income under the deferral method of Rev. Proc. 2004-34.

The examiner’s authority under § 9.02 of Rev. Proc. 2011-14 will continue to apply if it is determined that the taxpayer has not complied with all applicable provisions of the procedure other than the failure to obtain Consent of Director.  For example, failure to attach the statement in lieu of application to its return for the year of change, as required by APPENDIX § 15.11(2)(b) of Rev. Proc. 2011-14, is a change implemented without a proper application.

Contacts

If you have any questions, please contact the LB&I Issue Practice Group for Change in Accounting Methods (IPG-CAM).

This Directive is not an official pronouncement of law and cannot be used, cited, or relied upon as such.

cc:  Commissioner, LB&I
       Deputy Commissioner, Operations
       Deputy Commissioner, International
       Division Counsel, LB&I
       Chief, Appeals
       Directors, Field Operations

Page Last Reviewed or Updated: 11-Feb-2014