Guidance on Accounting Method Changes for Intangibles

Rev. Proc. 2004-23 explains the procedures for obtaining automatic consent to change an accounting method provided in the recently published Sec. 263(a) regulations, relating to the treatment of amounts paid to acquire or create intangible assets.

Background

The IRS and Treasury issued final regulations under Sec. 263(a) (TD 9107) relating to the determination of whether to capitalize expenditures incurred for an acquisition or creation of intangible assets, effective for amounts paid or incurred on or after Dec. 31, 2003. (For a discussion, see Braverman and Geracimos, Tax Clinic, Final Regs. on Capitalizing Transaction Costs, this issue, and Jagdman, Tax Clinic, Final Regs. on Capitalization of Intangibles, TTA, April 2004.)

Accordingly, a taxpayer may change its accounting method automatically to comply with the regulations for its first tax year ending on or after Dec. 31, 2003, by following Rev. Proc. 2002-9s automatic-method-change procedures. The final regulations also waive the Rev. Proc. 2002-9 scope limits. To implement a method change, taxpayers must calculate the Sec. 481(a) adjustment, taking into account only those costs incurred in tax years ending after Jan. 23, 2002.

The preamble notes that the IRS received numerous Forms 3115, Application for Change in Accounting Method, from taxpayers requesting consent to change an accounting method for items addressed in the advance notice of proposed rulemaking issued on Jan. 24, 2002 (REG-125638-01) or the proposed regulations issued on Dec. 19, 2002. The IRS suspended the processing of these requests pending publication of the final regulations. According to the preamble, the IRS now intends to process these requests in a manner consistent with the final regulations, but will return all changes concerning an accounting method that it did not recognize as permissible prior to the regulations effective date, and will advise the taxpayer to re-submit the change under the automatic consent procedures.

Rev. Proc. 2004-23

Taxpayers may obtain automatic consent for their first tax year ending on or after Dec. 31, 2003, to change to an accounting method provided in Regs. Secs. 1.263(a)-4 and -5 and 1.167(a)-3(b). The IRS intends to issue future guidance for accounting-method changes made for subsequent tax years, including automatic consent procedures for some or all accounting methods provided in the final regulations.

Pending changes: For method changes pending when the regulations were finalized, Rev. Proc. 2004-23 specifies that the Service will not grant a change request provided in the final regulations for a change year earlier than the final regulations effective date. (For example, it notes that the IRS had received numerous requests on the application of the 12-month rule uner Regs. Sec. 1.263(a)-4(f)(1), which is consistent with the holding in U.S. Freightways Corp., 270 F3d 1137 (7th Cir. 2001)). Affected taxpayers will be notified and given the opportunity to withdraw their requests and obtain a refund of the user fee. Any request not withdrawn will be processed in accordance with the procedures under which it was filed (e.g., Rev. Proc. 97-27) on the basis that the IRS National Office is adverse to the request.

Unauthorized changes: In addition, Rev. Proc. 2004-23 provides that a taxpayer that has made an unauthorized method change for an item, the treatment of which is provided for in the final regulations, can use the automatic consent procedures provided in Rev. Proc. 2004-23 only if it amends prior Federal income tax returns to correct the unauthorized change. A taxpayer that will file one or more amended returns must do so before (or at the same time as) it files Form 3115 under the procedure (including the copy of Form 3115 it files with the IRS National Office) for the taxpayers first tax year ending on or after Dec. 31, 2003.

Other: Rev. Proc. 2004-23 also applies to taxpayers seeking, in conjunction with these changes, to change their accounting method to use the three-and-a-half-month rule of Regs. Sec. 1.461-4(d)(6)(ii) or the recurring-item exception of Regs. Sec. 1.461-5.

Filing Form 3115: Rev. Proc. 2004-23 also provides several rules for filing Form 3115, including (1) reiteration of the waiver of the Rev. Proc. 2002-9, Section 4.02, scope-restrictions waiver, (2) procedures for using one Form 3115 for all changes under the regulations, (3) clarification of the information required as part of the filing, (4) the requirement that taxpayers use the current version of Form 3115 (revised December 2003), (5) a special filing address and (6) transition rules for certain taxpayers that had filed Form 3115 for their first effective tax year prior to the issuance of this guidance.

Under the transition rules, in general, if a taxpayer within the procedures scope has filed Form 3115 (including a copy filed with the IRS National Office in advance of filing a Federal income tax return) to change to an accounting method provided in the final regulations for its first tax year ending on or after Dec. 31, 2003, and the form does not comply with the procedures provisions, the taxpayer will not be considered to have filed the form pursuant to the final regulations automatic change procedures. The taxpayer may file a new Form 3115 that does comply with Rev. Proc. 2004-23, provided it files it within the Rev. Proc. 2002-9 timely filing requirements and labels the top: Corrected Form 3115 Filed Under Rev. Proc. 2004-23.

However, if a taxpayer within the scope of the procedure has filed Form 3115 prior to April 26, 2004, it is not required to file a new Form 3115 for the same change in accounting method if it follows the instructions in Section 6.02 of the revenue procedure (which, among other things, require the taxpayer to submit a written statement, signed under penalties of perjury, that includes any information required by the procedure, not included in the original filing).

Sec. 481(a) adjustment: Finally, the procedure contains rules for calculating the Sec. 481(a) adjustment. Specifically, the adjustment is computed by taking into account amounts paid or incurred in the period beginning with the first day of the tax year that includes Jan. 24, 2002, and ending on Dec. 30, 2003. However, as a matter of administrative convenience, a taxpayer may report amounts paid or incurred on Dec. 31, 2003, as part of the adjustment.

From Mathew Borrack, CPA, MST, and Cathy Fitzpatrick, CPA, MST, Washington, DC