IRB 2016-21 (Rev. May 23, 2016) · 2016-05-20 · Rev. Proc. 2016–31, page 988. The revenue...

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

REG–127199–15, page 1007.Proposed regulations would treat a domestic disregarded en-tity wholly owned by a foreign person as a domestic corpora-tion separate from its owner for the limited purposes of thereporting, record maintenance and associated compliance re-quirements that apply to 25 percent foreign-owned domesticcorporations under section 6038A of the Code.

Rev. Proc. 2016–29, page 880.This revenue procedure provides the List of AutomaticChanges to which the automatic change procedures in Rev.Proc. 2015–13, 2015–5 I.R.B. 419, as clarified and modifiedby Rev. Proc. 2015–33, 2015–24 I.R.B. 1067, and as modi-fied by Rev. Proc. 2016–1, 2016–1 I.R.B. 1, (or successor)apply. The definitions in section 3 of Rev. Proc. 2015–13 applyto this revenue procedure. Rev. Proc. 2015–14 is supersededin part.

Rev. Proc. 2016–30, page 981.This document revises Rev. Proc. 2009–14, which outlines theprocedures to resolve issues through a pre-filing agreement(PFA). The Rev. Proc. (1) expands the scope of a PFA to includeissues relating to changes in methods of accounting requestedpursuant to the automatic consent procedures; (2) reflectsLBI’s new structure; (3) clarifies or updates procedures for flingPFA requests; and (4) increases the user fee for PFAs from$50,000 to $134,300 for requests submitted on or after thedate that is 30 days after the Rev. Proc. is released, to$218,600 for requests submitted on or after January 1, 2017.

Rev. Proc. 2016–31, page 988.The revenue procedure provides that certain contributions thatmoney market funds receive from sponsors may be excludedfrom the distribution requirements of § 852(a) of the InternalRevenue Code but are included in investment company taxableincome for purposes of § 852(b).

Notice 2016–32, page 878.The notice provides alternative diversification requirementsunder section 817(h) of the Internal Revenue Code for a seg-regated asset account that invests in a money market fund(MMF) that is a government MMF.

T.D. 9767, page 857.Final regulations providing guidance under section 432(e)(9)(D)(vii)on an additional limitation on a benefit suspension with respectto certain multiemployer defined benefit pension plans in criti-cal and declining funded status.

EMPLOYEE PLANS

T.D. 9767, page 857.Final regulations providing guidance under section 432(e)(9)(D)(vii)on an additional limitation on a benefit suspension with respectto certain multiemployer defined benefit pension plans in criti-cal and declining funded status.

(Continued on the next page)

Finding Lists begin on page ii.

Bulletin No. 2016–21May 23, 2016

EXEMPT ORGANIZATIONS

Announcement 2016–20, page 991.Serves notice to potential donors of organizations that haverecently filed a timely declaratory judgment suit under section7428 of the Code, challenging revocation of its status as aneligible donee under section 170(c)(2).

EMPLOYMENT TAX

REG–114307–15, page 1006.Generally, for federal income tax purposes, a business entitythat has a single owner and is not a corporation is disregardedas an entity separate from its owner (a disregarded entity).However, for purposes of employment taxes, a disregardedentity is treated as a corporation, except that the owner of adisregarded entity who is treated as a sole proprietor forincome tax purposes remains subject to self-employmenttaxes. The current regulations do not explicitly address situa-tions in which the owner of a disregarded entity is a partner-ship. These proposed regulations address this issue by clari-fying that the rule that a disregarded entity is treated as acorporation for employment tax purposes does not alter theself-employment tax treatment of any individuals who are part-ners in the partnership that owns a disregarded entity.

REG–127561–15, page 991.The Stephen Beck, Jr., Achieving a Better Life Experience Actof 2014 requires the establishment of a voluntary certificationprogram for professional employer organizations. A profes-sional employer organization, sometimes referred to as anemployee leasing company, is an organization that enters intoan agreement with a client to perform some or all of the federalemployment tax withholding, reporting, and payment functionsrelated to workers performing services for the client. Beingcertified by the IRS as a certified professional employer orga-nization (CPEO) has certain federal employment tax conse-quences for both the CPEO and its customers and clients.These proposed regulations set forth the federal employmenttax liabilities and other obligations of persons certified by theIRS as CPEOs.

T.D. 9766, page 855.Generally, for federal income tax purposes, a business entitythat has a single owner and is not a corporation is disregardedas an entity separate from its owner (a disregarded entity).However, for purposes of employment taxes, a disregardedentity is treated as a corporation, except that the owner of adisregarded entity who is treated as a sole proprietor forincome tax purposes remains subject to self-employmenttaxes. The current regulations do not explicitly address situa-tions in which the owner of a disregarded entity is a partner-ship. These temporary regulations address this issue by clari-fying that the rule that a disregarded entity is treated as acorporation for employment tax purposes does not alter theself-employment tax treatment of any individuals who are part-ners in the partnership that owns a disregarded entity.

T.D. 9768, page 862.The Stephen Beck, Jr., Achieving a Better Life Experience Act of2014 requires the establishment of a voluntary certification pro-gram for professional employer organizations. A professionalemployer organization, sometimes referred to as an employeeleasing company, is an organization that enters into an agreementwith a client to perform some or all of the federal employment taxwithholding, reporting, and payment functions related to workersperforming services for the client. Being certified by the IRS as acertified professional employer organization (CPEO) has certainfederal employment tax consequences for both the CPEO and itscustomers and clients. These final and temporary regulationsdescribe the requirements a person must satisfy in order tobecome and remain a CPEO.

SELF–EMPLOYMENT TAX

REG–114307–15, 1006.Generally, for federal income tax purposes, a business entitythat has a single owner and is not a corporation is disregardedas an entity separate from its owner (a disregarded entity).However, for purposes of employment taxes, a disregardedentity is treated as a corporation, except that the owner of adisregarded entity who is treated as a sole proprietor forincome tax purposes remains subject to self-employmenttaxes. The current regulations do not explicitly address situa-tions in which the owner of a disregarded entity is a partner-ship. These proposed regulations address this issue by clari-fying that the rule that a disregarded entity is treated as acorporation for employment tax purposes does not alter theself-employment tax treatment of any individuals who are part-ners in the partnership that owns a disregarded entity.

(Continued on the next page)

T.D. 9766, page 855.Generally, for federal income tax purposes, a business entitythat has a single owner and is not a corporation is disregardedas an entity separate from its owner (a disregarded entity).However, for purposes of employment taxes, a disregardedentity is treated as a corporation, except that the owner of adisregarded entity who is treated as a sole proprietor forincome tax purposes remains subject to self-employmenttaxes. The current regulations do not explicitly address situa-tions in which the owner of a disregarded entity is a partner-ship. These temporary regulations address this issue by clari-fying that the rule that a disregarded entity is treated as acorporation for employment tax purposes does not alter theself-employment tax treatment of any individuals who are part-ners in the partnership that owns a disregarded entity.

ADMINISTRATIVE

REG–127199–15, page 1007Proposed regulations would treat a domestic disregarded en-tity wholly owned by a foreign person as a domestic corpora-tion separate from its owner for the limited purposes of thereporting, record maintenance and associated compliance re-quirements that apply to 25 percent foreign-owned domesticcorporations under section 6038A of the Code.

Rev. Proc. 2016–30, page 981.This document revises Rev. Proc. 2009–14, which outlines theprocedures to resolve issues through a pre-filing agreement(PFA). The Rev. Proc. (1) expands the scope of a PFA to includeissues relating to changes in methods of accounting requestedpursuant to the automatic consent procedures; (2) reflectsLBI’s new structure; (3) clarifies or updates procedures for flingPFA requests; and (4) increases the user fee for PFAs from$50,000 to $134,300 for requests submitted on or after thedate that is 30 days after the Rev. Proc. is released, to$218,600 for requests submitted on or after January 1, 2017.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

May 23, 2016 Bulletin No. 2016–21

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986§ 301.7701–2T: Business entities; definitions (temporary)

T.D. 9766DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Self-employment TaxTreatment of Partners in aPartnership that Owns aDisregarded Entity

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-nal and temporary regulations that clarifythe employment tax treatment of partnersin a partnership that owns a disregardedentity. These regulations affect partners ina partnership that owns a disregarded en-tity. The text of these temporary regula-tions serves as the text of proposed regu-lations (REG–114307–15) published inthe Proposed Rules section in this issue ofthe Internal Revenue Bulletin.

DATES: Effective date: These regulationsare effective on May 4, 2016.

Applicability date: For date of applica-bility, see § 301–7701–2T(e)(8).

FOR FUTHER INFORMATIONCONTACT:

Andrew K. Holubeck at (202) 317-4774 (not a toll-free number).

SUPPLEMENTARY INFORMATION

Background

Section 301.7701–2(c)(2)(i) states that,except as otherwise provided, a businessentity that has a single owner and is not acorporation under § 301.7701–2(b) is dis-regarded as an entity separate from itsowner (a disregarded entity). However,§ 301.7701–2(c)(2)(iv)(B) provides thatan entity that is a disregarded entity istreated as a corporation for purposes ofemployment taxes imposed under subtitle

C of the Internal Revenue Code (Code).Therefore, the disregarded entity, ratherthan the owner, is considered to be theemployer of the entity’s employees forpurposes of employment taxes imposedby subtitle C.

While § 301.7701–2(c)(2)(iv)(B) treatsa disregarded entity as a corporation foremployment tax purposes, this rule doesnot apply for self-employment tax purposes.Specifically, § 301.7701–2(c)(2)(iv)(C)(2)provides that the general rule of§ 301.7701–2(c)(2)(i) applies for self-employment tax purposes. After settingforth this general rule, the regulation ap-plies this rule in the context of a singleindividual owner by stating that the ownerof an entity that is treated in the samemanner as a sole proprietorship is subjectto tax on self-employment income. Theregulation, at § 301.7701–2(c)(2)(iv)(D),also includes an example that specificallyillustrates the mechanics of the rule. In theexample, the disregarded entity is subjectto employment tax with respect to em-ployees of the disregarded entity. The in-dividual owner, however, is subject toself-employment tax on the net earningsfrom self-employment resulting from thedisregarded entity’s activities. The regula-tions do not include a separate example inwhich the disregarded entity is owned bya partnership.

It has come to the attention of the Trea-sury Department and the IRS that eventhough the regulations set forth a generalrule that an entity is disregarded as a sep-arate entity from the owner for self-employment tax purposes, some taxpayersmay have read the current regulations topermit the treatment of individual partnersin a partnership that owns a disregardedentity as employees of the disregardedentity because the regulations did not in-clude a specific example applying the gen-eral rule in the partnership context. Underthis reading, which was not intended,some taxpayers have permitted partners toparticipate in certain tax-favored em-ployee benefit plans. The Treasury De-partment and the IRS note that the regu-lations did not create a distinctionbetween a disregarded entity owned by an

individual (that is, a sole proprietorship)and a disregarded entity owned by a part-nership in the application of the self-employment tax rule. Rather, § 301.7701–2(c)(2)(iv)(C)(2) provides that the generalrule of § 301.7701–2(c)(2)(i) applies forself-employment tax purposes for anyowner of a disregarded entity withoutcarving out an exception regarding a part-nership that owns such a disregarded en-tity. In addition, the Treasury Departmentand the IRS do not believe that the regu-lations alter the holding of Rev. Rul. 69–184, 1969–1 CB 256, which providesthat: (1) bona fide members of a partner-ship are not employees of the partnershipwithin the meaning of the Federal Insur-ance Contributions Act, the Federal Un-employment Tax Act, and the Collectionof Income Tax at Source on Wages (chap-ters 21, 23, and 24, respectively, subtitleC, Internal Revenue Code of 1954), and(2) such a partner who devotes time andenergy in the conduct of the trade or busi-ness of the partnership, or in providingservices to the partnership as an indepen-dent contractor, is, in either event, a self-employed individual rather than an indi-vidual who, under the usual common lawrules applicable in determining theemployer-employee relationship, has thestatus of an employee.

To address this issue, the Treasury De-partment and the IRS clarify in these tem-porary regulations that the rule that a dis-regarded entity is treated as a corporationfor employment tax purposes does not ap-ply to the self-employment tax treatmentof any individuals who are partners in apartnership that owns a disregarded entity.The rule that the entity is disregarded forself-employment tax purposes applies topartners in the same way that it applies toa sole proprietor owner. Accordingly, thepartners are subject to the same self-employment tax rules as partners in a part-nership that does not own a disregardedentity.

Explanation of Provisions

This document contains amendmentsto the Procedure and Administration Reg-ulations (26 CFR part 301) under section

Bulletin No. 2016–21 May 23, 2016855

7701 of the Code to clarify that a disre-garded entity that is treated as a corpora-tion for purposes of employment taxesimposed under subtitle C of the Code isnot treated as a corporation for purposesof employing its individual owner, who istreated as a sole proprietor, or employingan individual that is a partner in a partner-ship that owns the disregarded entity.Rather, the entity is disregarded as an en-tity separate from its owner for this pur-pose. Existing regulations already pro-vide that the entity is disregarded forself-employment tax purposes and spe-cifically note that the owner of an entitytreated in the same manner as a soleproprietorship under § 301.7701–2(a) issubject to tax on self-employment in-come. These temporary regulations ap-ply this existing general rule to illustratethat, if a partnership is the owner of adisregarded entity, the partners in thepartnership are subject to the same self-employment tax rules as partners in apartnership that does not own a disre-garded entity.

While these temporary regulations pro-vide that a disregarded entity owned by apartnership is not treated as a corporationfor purposes of employing any partner ofthe partnership, these regulations do notaddress the application of Rev. Rul. 69–184 in tiered partnership situations. Sev-eral commenters have requested that theIRS provide additional guidance on theapplication of Rev. Rul. 69–184 to tieredpartnership situations, and have also sug-gested modifying the holding of Rev. Rul.69–184 to allow partnerships to treat part-ners as employees in certain circum-stances, such as, for example, employeesin a partnership who obtain a small own-ership interest in the partnership as anemployee compensatory award or incen-tive. However, these commenters have notprovided detailed analyses and sugges-tions as to how the employee benefit andemployment tax rules would apply in suchsituations. The Treasury Department andthe IRS request comments on the appro-priate application of the principles of Rev.Rul. 69–184 to tiered partnership situa-tions, the circumstances in which it maybe appropriate to permit partners to alsobe employees of the partnership, and theimpact on employee benefit plans (includ-ing, but not limited to, qualified retirement

plans, health and welfare plans, and fringebenefit plans) and on employment taxes ifRev. Rul. 69–184 were to be modified topermit partners to also be employees incertain circumstances.

In order to allow adequate time forpartnerships to make necessary payrolland benefit plan adjustments, these tem-porary regulations will apply on the laterof: (1) August 1, 2016, or (2) the firstday of the latest-starting plan year fol-lowing May 4, 2016, of an affected plan(based on the plans adopted before, andthe plan years in effect as of, May 4,2016) sponsored by an entity that isdisregarded as an entity separate fromits owner for any purpose under§ 301.7701–2. For these purposes, anaffected plan includes any qualifiedplan, health plan, or section 125 cafete-ria plan if the plan benefits participantswhose employment status is affected bythese regulations. For rules that applybefore the applicability date of theseregulations, see 26 CFR part 301 revisedas of April 1, 2016.

Special Analysis

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It has also been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. Forapplicability of the Regulatory FlexibilityAct (5 U.S.C. chapter 6), please refer tothe Special Analysis section in the pream-ble to the cross-referenced notice of pro-posed rulemaking in the Proposed Rulessection of this issue of the Internal Rev-enue Bulletin. Pursuant to section 7805(f)of the Code, these regulations were sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on its impact on small business.

Drafting Information

The principal author of these regula-tions is Andrew Holubeck of the Office ofthe Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities). However, other personnel from

the IRS and the Treasury Department par-ticipated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 301 isamended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.7701–2 is amended

by:1. Revising paragraph (c)(2)(iv)(C)(2).2. Adding paragraph (e)(8).

The revision and addition reads as fol-lows:

§ 301.7701–2 Business entities;definitions.

* * * * *(c) * * *(2) * * *(iv) * * *(C) * * *(2) [Reserved]. For further guidance,

see § 301.7701–2T(c)(2)(iv)(C)(2).* * * * *(e)(8) [Reserved]. For further guid-

ance, see § 301.7701–2T(e)(8).Par. 3. Section 301.7701–2T is added

to read as follows:

§ 301.7701–2T Business entities;definitions (temporary).

(a) through (c)(2)(iv)(C)(1) [Re-served]. For further guidance, see§ 301.7701–2(a) through (c)(2)(iv)(C)(1).

(2) Section 301.7701–2(c)(2)(i) appliesto taxes imposed under subtitle A, includ-ing Chapter 2—Tax on Self-EmploymentIncome. Thus, an entity that is treated inthe same manner as a sole proprietorshipunder § 301.7701–2(a) is not treated as acorporation for purposes of employing itsowner; instead, the entity is disregarded asan entity separate from its owner for thispurpose and is not the employer of itsowner. The owner will be subject to self-employment tax on self-employment in-come with respect to the entity’s activi-ties. Also, if a partnership is the owner of

May 23, 2016 Bulletin No. 2016–21856

an entity that is disregarded as an entityseparate from its owner for any purposeunder § 301.7701–2, the entity is nottreated as a corporation for purposes ofemploying a partner of the partnershipthat owns the entity; instead, the entity isdisregarded as an entity separate from thepartnership for this purpose and is not theemployer of any partner of the partner-ship that owns the entity. A partner of apartnership that owns an entity that isdisregarded as an entity separate fromits owner for any purpose under§ 301.7701–2 is subject to the sameself-employment tax rules as a partnerof a partnership that does not own anentity that is disregarded as an entityseparate from its owner for any purposeunder § 301.7701–2.

(c)(2)(iv)(D) through (e)(7) [Reserved].For further guidance, see § 301.7701–2(c)(2)(iv)(D) through (e)(7).

(8)(i) Effective/applicability date. Para-graph (c)(2)(iv)(C)(2) of this section ap-plies on the later of–

(A) August 1, 2016, or(B) The first day of the latest-starting

plan year following May 4, 2016, of anaffected plan (based on the plans adoptedbefore, and the plan years in effect as of,May 4, 2016) sponsored by an entitythat is disregarded as an entity separatefrom its owner for any purpose under§ 301.7701–2. For rules that apply be-fore the applicability date of these reg-ulations, see 26 CFR part 301 revised asof April 1, 2016. For these purposes—

(1) An affected plan includes any qual-ified plan, health plan, or section 125 caf-eteria plan if the plan benefits participantswhose employment status is affected byparagraph (c)(2)(iv)(C)(2),

(2) A qualified plan means a plan, con-tract, pension, or trust described in para-graph (A) or (B) of section 219(g)(5)(other than paragraph (A)(iii)), and

(3) A health plan means an arrange-ment described under § 1.105–5 of thischapter.

(ii) Expiration date. The applicabilityof paragraph (c)(2)(iv)(C)(2) of this sec-tion expires on or before May 3, 2019 orsuch earlier date as may be determined

under amendments to the regulations is-sued after May 3, 2016.

John M. DalrympleDeputy Commissioner for

Services and Enforcement.

Approved: April 20, 2016.

Mark J. MazurAssistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 3, 2016,8:45 a.m., and published in the issue of the Federal Registerfor May 4, 2016, 81 F.R. 26693)

26 CFR 1.432(e)(9)–1

T.D. 9767

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Additional Limitation onSuspension of BenefitsApplicable to Certain PensionPlans Under theMultiemployer PensionReform Act of 2014

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: The Multiemployer PensionReform Act of 2014 (“MPRA”), whichwas enacted by Congress as part of theConsolidated and Further Continuing Ap-propriations Act of 2015, relates to mul-tiemployer defined benefit pension plansthat are projected to have insufficientfunds, within a specified timeframe, topay the full plan benefits to which indi-viduals will be entitled (referred to asplans in “critical and declining status”).Under MPRA, the sponsor of such a planis permitted to reduce the pension benefitspayable to plan participants and beneficia-ries if certain conditions and limitationsare satisfied (referred to in MPRA as a“suspension of benefits”). One specific

limitation governs the application of asuspension of benefits under any plan thatincludes benefits directly attributable to aparticipant’s service with any employerthat has withdrawn from the plan in acomplete withdrawal, paid its full with-drawal liability, and, pursuant to a collec-tive bargaining agreement, assumed lia-bility for providing benefits to participantsand beneficiaries equal to any benefits forsuch participants and beneficiaries re-duced as a result of the financial status ofthe plan. This document contains finalregulations that provide guidance relatingto this specific limitation. These regula-tions affect active, retired, and deferredvested participants and beneficiaries underany such multiemployer plan in criticaland declining status as well as employerscontributing to, and sponsors and admin-istrators of, those plans.

DATES: Effective Date: These regula-tions are effective on May 5, 2016.

Applicability Date: These regulationsapply to suspensions for which the ap-proval or denial is issued on or after April26, 2016. In the case of a systemicallyimportant plan, the final regulations applywith respect to any modified suspensionimplemented on or after April 26, 2016.

FOR FURTHER INFORMATIONCONTACT: The Department of the Trea-sury MPRA guidance information line at(202) 622-1559 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendmentsto the Income Tax Regulations (26 CFRpart 1) under section 432(e)(9) of the In-ternal Revenue Code (Code), as amendedby section 201 of the Multiemployer Pen-sion Reform Act of 2014, Division O ofthe Consolidated and Further ContinuingAppropriations Act, 2015, Public Law No.113–235 (128 Stat. 2130 (2014))(MPRA).1 As amended, section 432(e)(9)permits plan sponsors of certain multiem-ployer plans to reduce the plan benefitspayable to participants and beneficiariesby plan amendment (referred to in the

1Section 201 of MPRA makes parallel amendments to section 305 of the Employee Retirement Income Security Act of 1974, Public Law 93–406 (88 Stat. 829 (1974)), as amended (ERISA).The Treasury Department has interpretive jurisdiction over the subject matter of these provisions under ERISA as well as the Code. See also section 101 of Reorganization Plan No. 4 of1978 (43 FR 47713). Thus, these final Treasury regulations issued under section 432 of the Code apply as well for purposes of section 305 of ERISA.

Bulletin No. 2016–21 May 23, 2016857

statute as a “suspension of benefits”) ifspecified conditions are satisfied. A plansponsor that seeks to implement a suspen-sion of benefits must submit an applica-tion for approval of that suspension to theSecretary of the Treasury. The Secretaryof the Treasury, in consultation with thePension Benefit Guaranty Corporationand the Secretary of Labor (generally re-ferred to in this preamble as the TreasuryDepartment, PBGC, and Labor Depart-ment, respectively), is required by thestatute to approve the application uponfinding that certain specified conditionsare satisfied.

One condition, set forth in section432(e)(9)(D)(vii), is a specific limitationon how a suspension of benefits must beapplied under a plan that includes benefitsthat are directly attributable to a partici-pant’s service with any employer de-scribed in section 432(e)(9)(D)(vii)(III).An employer is described in section432(e)(9)(D)(vii)(III) if the employer has,prior to the date MPRA was enacted (De-cember 16, 2014): (1) withdrawn from theplan in a complete withdrawal under sec-tion 4203 of ERISA; (2) paid the fullamount of the employer’s withdrawal lia-bility under section 4201(b)(1) of ERISAor an agreement with the plan; and (3)pursuant to a collective bargaining agree-ment, assumed liability for providing ben-efits to participants and beneficiaries ofthe plan under a separate, single-employerplan sponsored by the employer, in anamount equal to any amount of benefitsfor these participants and beneficiaries re-duced as a result of the financial status ofthe plan. Such an employer is referred toin this preamble as a “subclause III em-ployer,” and a collective bargaining agree-ment under which the employer assumesliability for those benefits is referred to asa “make-whole agreement.”

If section 432(e)(9)(D)(vii) applies to aplan then, under section 432(e)(9)(D)(vii)(I),the suspension of benefits must first beapplied to the maximum extent permissi-ble to benefits attributable to a partici-pant’s service with an employer that with-drew from the plan and failed to pay (or isdelinquent with respect to paying) the fullamount of its withdrawal liability under

section 4201(b)(1) of ERISA or an agree-ment with the plan. Such an employer isreferred to in this preamble as a “sub-clause I employer.” Second, under section432(e)(9)(D)(vii)(II), except as providedin section 432(e)(9)(D)(vii)(III), a suspen-sion of benefits must be applied to allother benefits under the plan that maybe suspended. Third, under section432(e)(9)(D)(vii)(III), a suspension mustbe applied to benefits under the plan thatare directly attributable to a participant’sservice with a subclause III employer. Anemployer under the plan is referred to inthis preamble as a “subclause II em-ployer” if it is neither a subclause I em-ployer nor a subclause III employer.

On October 23, 2015, the Treasury De-partment published a notice in the FederalRegister (80 FR 64508) regarding an appli-cation for a proposed suspension of benefits,which represented that the plan is of the typeto which section 432(e)(9)(D)(vii) applies.The notice requested public comments onall aspects of the application, including withrespect to the interpretation of section432(e)(9)(D)(vii) that is reflected in the ap-plication.

On February 11, 2016, the TreasuryDepartment and the IRS published pro-posed regulations (REG–101701–16) re-garding the specific limitation on a sus-pension of benefits under section432(e)(9)(D)(vii) in the Federal Registerat 81 FR 7253. Comments were receivedon the proposed regulations and a publichearing was held on March 22, 2016.

After consideration of the written com-ments received and the oral commentspresented at the public hearing, the provi-sions of the proposed regulations are ad-opted as revised by this Treasury decision.The Treasury Department consulted withPBGC and the Labor Department in de-veloping these regulations.2


These regulations amend the IncomeTax Regulations (26 CFR part 1) to provideguidance regarding section 432(e)(9)(D)(vii).Section 432(e)(9)(D)(vii) sets forth a rule thatlimits how a suspension may be appliedunder a plan that includes benefits that aredirectly attributable to a participant’s ser-

vice with a subclause III employer. Indetermining how a suspension should beallocated consistent with MPRA’s frame-work and purpose, the Treasury Depart-ment and the IRS analyzed the statute andapplied well-established principles of stat-utory construction to interpret section432(e)(9)(D)(vii). In so doing, the Trea-sury Department and the IRS interpretedsection 432(e)(9)(D)(vii) in the context ofsection 432(e)(9) as a whole, which re-quires, among other things, that any sus-pension be subject to certain limitations,including that the suspension be equitablydistributed across the participant and ben-eficiary population.

I. Application of a Suspension ofBenefits to Subclause I Benefits to theMaximum Extent Permissible

Subclause (I) of section 432(e)(9)(D)(vii)provides that the suspension of benefitsmust first be applied “to the maximumextent permissible” to benefits attributableto service with a subclause I employer(referred to in this preamble as “subclauseI benefits”). Accordingly, the proposedregulations provided that, for a plan that issubject to section 432(e)(9)(D)(vii), a sus-pension of benefits must be applied to themaximum extent permissible to subclauseI benefits before reductions are permittedto be applied to any other benefits. Underthe proposed regulations, only if such asuspension is not reasonably estimated toachieve the level that is necessary to en-able the plan to avoid insolvency may asuspension then be applied to other bene-fits that are permitted to be suspended andthat are attributable to a participant’s ser-vice with other employers. No commentersobjected to this provision of the proposedregulations, and these final regulationsadopt this provision as proposed.

II. Relationship Between Subclause IIBenefits and Subclause III Benefits

In contrast to subclause (I) of section432(e)(9)(D)(vii), subclause (II) does notinclude the phrase “to the maximum ex-tent permissible.” Accordingly, the Trea-sury Department and the IRS developedthe rules in the proposed regulations based

2TheTreasury Department and the IRS have published final regulations providing general guidance regarding section 432(e)(9). See § 1.432(e)(9)–1 (TD 9765), published in the FederalRegister on April 28, 2016 (81 FR 25539).

May 23, 2016 Bulletin No. 2016–21858

on the interpretation that a suspension neednot be applied to the maximum extent per-missible to benefits described in subclause(II) before any suspension is applied to ben-efits described in subclause (III).

A number of commenters expressedviews regarding the rules under the pro-posed regulations describing how the sus-pension of benefits is permitted to apply tobenefits attributable to service with a sub-clause II employer (referred to in this pre-amble as “subclause II benefits”) and ben-efits directly attributable to service with asubclause III employer (referred to in thispreamble as “subclause III benefits”).Many of these commenters agreed withthe analysis set forth in the preamble tothe proposed regulations and supported aninterpretation of the statute that subclauseII benefits are not required to be reducedto the maximum extent permissible beforeany subclause III benefits can be reduced.

Two commenters advocated that thestatute be interpreted to require that sub-clause II benefits be suspended to the max-imum extent permissible before a suspen-sion is permitted to apply to any subclauseIII benefits. These commenters maintainedthat this result is required by the ordinalnumbering of the three subclauses and as-serted that Congress intended to favor anywithdrawing employer that not only paid thefull amount of its withdrawal liability butalso entered into a make-whole agreement.If such an approach were applied under sec-tion 432(e)(9)(D)(vii), then the benefits de-scribed in each of the first two subclauseswould be required to be suspended to themaximum extent permissible before anysuspension could apply to benefits describedin the successive subclause. Under that ap-proach, subclause III benefits would be per-mitted to be suspended only if all benefitsattributable to participants’ service with allsubclause I and subclause II employers weresuspended to the maximum extent permis-sible. In support of this position, one com-menter asserted that the Treasury Depart-ment and the IRS misinterpreted the importof the absence of the phrase “to the maxi-mum extent permissible” in subclause (II).

This commenter asserted that the combineduse in subclause (II) of “second,” “except asprovided by subclause (III),” and “all otherbenefits” has the same effect with respect tosubclause II benefits as the use in subclause(I) of “to the maximum extent permissible”has with respect to subclause I benefits. Thiscommenter argued that the difference in lan-guage between subclause (I) and subclause(II) does not prevent the two rules fromhaving the same effect, and cited to Kirt-saeng v. John Wiley & Sons, Inc., 568 U.S.___, 133 S. Ct. 1351, 1364 (2013) in sup-port of this argument.

After carefully considering this argu-ment and applicable authorities, the Trea-sury Department and the IRS have con-cluded that this interpretation is incorrect;the statute does not require subclause IIbenefits to be suspended to the maximumextent permissible before any subclauseIII benefits are permitted to be suspended,and the rule set forth in the proposedregulations is the correct interpretation ofthe statute. Applicable case law estab-lishes that a difference in language be-tween one statutory provision and the nextimmediately following provision shouldbe given meaning. See Loughrin v. UnitedStates, 573 U.S. ___,134 S. Ct. 2384,2390 (2014) (“We have often noted thatwhen ‘Congress includes particular lan-guage in one section of a statute but omitsit in another’—let alone in the very nextprovision—this Court ‘presume[s]’ thatCongress intended a difference in mean-ing.” (quoting Russello v. United States,464 U.S. 16, 23 (1983)). To read sub-clause (II) to require that subclause II ben-efits be suspended “to the maximum ex-tent permissible” even though thatlanguage does not appear in subclause (II)would effectively rewrite the statute eitherby moving the phrase the “to the maxi-mum extent permissible” from subclause(I) to the introductory language of section432(e)(9)(D)(vii) or by adding it to sub-clause (II).3 The interpretation in the pro-posed regulations is also consistent withthe language in subclause (II) (“except asprovided in subclause (III)”), which con-

templates a coordinated application of twoprovisions that are to be applied “second”and “third;” this language in subclause (II)is not consistent with an interpretation thatrequires application of a suspension tosubclause II benefits that is independent of(and entirely preceding) the application ofthe suspension to subclause III benefits.

Kirtsaeng, which the one commentercited to contest this interpretation in theproposed regulations, involved twophrases that “mean roughly the samething.” Id. at 1358–59, 1364 (“The lan-guage of [the relevant statute] read liter-ally favors [petitioner’s] interpretation,namely, that ‘lawfully made under thistitle’ means made ‘in accordance with’ or‘in compliance with’ the CopyrightAct.”). There are no “roughly” similarphrases across subclauses (I) and (II).Kirtsaeng is therefore inapposite.4

The Treasury Department and the IRSrecognize that the language of section432(e)(9)(D)(vii) bears some similarity toother statutory provisions that establishpriority categories requiring claims to befully satisfied under each earlier categorybefore any claims are permitted to be sat-isfied under any subsequent category—forexample, section 4044(a) of ERISA andsections 507(a) and 726(a) and (c) of theBankruptcy Code, which in each instanceprescribes ordering rules relating to thedistribution of limited assets. However, incontrast to the language in section432(e)(9)(D)(vii), these other statutoryprovisions do not include language in onecategory instructing that the categorymust be fully exhausted before reachingthe next category, while omitting thatlanguage in other categories. Further-more, if the ordinal numbering of sec-tion 432(e)(9)(D)(vii) were to be inter-preted to require that each category befully exhausted before reaching the nextcategory, then the phrase “to the maxi-mum extent permissible” in subclause(I) would not serve any purpose andwould be superfluous.5

The broad scope of benefits included insubclause (III) further supports the con-

3See Hall v. United States, 566 U.S. ___, 132 S. Ct. 1882, 1893 (2012) (“[I]t is not for us to rewrite the statute.”)

4Kirtsaeng is further inapposite because the statutory provisions of the Copyright Act that were compared to each other in that case (i.e., 17 U.S.C. § 109 and § 602) were not in immediateproximity to each other unlike the subclauses at issue here.

5See Marx v. General Revenue Corp., 568 U.S. ___, 133 S. Ct. 1166, 1178 (2013) (“[T]he canon against surplusage is strongest when an interpretation would render superfluous anotherpart of the same statutory scheme.”).

Bulletin No. 2016–21 May 23, 2016859

clusion that a suspension need not be ap-plied to the maximum extent permissibleto subclause II benefits before any suspen-sion is applied to subclause III benefits.As explained in Section D of this pream-ble, subclause III benefits include all ben-efits that are directly attributable to ser-vice with a subclause III employer,without regard to whether those benefitsare subject to a make-whole agreement. Ifsubclause II benefits were required to bereduced to the maximum extent permissi-ble before any subclause III benefits couldbe reduced (including subclause III bene-fits not subject to a make-whole agree-ment), then participants with subclause IIIbenefits who are not subject to the make-whole agreement could experience signif-icantly smaller reductions than partici-pants with subclause II benefits (includingbenefits attributable to service with em-ployers that never withdrew from theplan), without regard to whether that dif-ference is consistent with the equitabledistribution requirement.

For these reasons, these final regula-tions adopt the rule under the proposedregulations that subclause II benefits arenot required to be suspended “to the max-imum extent permissible” before any sus-pension is permitted to be applied to sub-clause III benefits.

III. Standard for Application ofSuspension to Subclause III BenefitsRelative to Subclause II Benefits

In order to give effect to the require-ment that a suspension of benefits be ap-plied “second” to subclause II benefits and“third” to subclause III benefits, the pro-posed regulations provided that a suspen-sion would not be permitted to reducesubclause III benefits unless subclause IIbenefits were reduced to at least the sameextent as subclause III benefits were re-duced. Under the proposed regulations,this limitation would be satisfied if noparticipant’s benefits that are directly at-tributable to service with a subclause IIIemployer were reduced more than thatparticipant’s benefits would have been re-duced if, holding constant the benefit for-mula, work history, and all relevant fac-

tors used to compute benefits, thosebenefits were attributable to service withany other employer. The effect of the pro-posed rule is to protect a subclause IIIemployer from the possibility that the sus-pension would be expressly designed totake advantage of the employer’s commit-ment to make participants and beneficia-ries whole for the reductions.

Most commenters agreed with theanalysis set forth in the preamble tothe proposed regulations and supportedthe rule that a suspension would not bepermitted to reduce subclause III benefitsunless subclause II benefits are reduced toat least the same extent. However, onecommenter maintained that, if the Trea-sury Department and the IRS were toadopt the rule set forth in the proposedregulations intended to protect a subclauseIII employer, then the rule should be mod-ified to prohibit facially neutral suspen-sion provisions that have a disparate im-pact on subclause III benefits or that areintentionally designed to produce such animpact. Under such a rule, a suspension ofbenefits that disproportionally reducessubclause III benefits in the aggregate rel-ative to subclause II benefits in the aggre-gate would be prohibited under section432(e)(9)(D)(vii) even if the suspensiondoes not by its terms treat individuals withsubclause III benefits in a less favorablemanner than similarly situated individualswith subclause II benefits.

Nothing in the statute or preexistingcase law requires the application of a dis-parate impact standard. Both Congressand the Supreme Court have required sucha standard only in the unique context inwhich “barriers operate invidiously to dis-criminate on the basis of racial or otherimpermissible classification,” Griggs v.Duke Power Co., 401 U.S. 424, 431(1971); see, e.g., 42 U.S.C. § 2000e–2(k)(1)(A)(i) (prohibiting “a particularemployment practice that causes a dispa-rate impact on the basis of race, color,religion, sex, or national origin”); see alsoTexas Department of Housing and Com-munity Affairs, et al., v. Inclusive Commu-nities Project, Inc., et al., 576 U. S. ___ ,135 S. Ct. 2507, 2513 (2015) (“a disparate-

impact claim challenges practices that havea ‘disproportionately adverse effect on mi-norities’ and are otherwise unjustified by alegitimate rationale”). Those unique circum-stances are not present here.

After considering the public com-ments, the Treasury Department and theIRS have determined that the rule set forthin the proposed regulations appropriatelyprotects a subclause III employer from thepossibility that the suspension would beexpressly designed to take advantage ofthe employer’s commitment to make par-ticipants and beneficiaries whole for thereductions in a manner that is most con-sistent with all of the statutory language.6

However, in response to comments iden-tifying potential ambiguities in the pro-posed regulations, the application of thisrule in the final regulations has been clar-ified. Accordingly, these final regulationsprovide that a suspension does not violatethe required relationship between sub-clause III benefits and subclause II bene-fits if no individual’s benefits that are sub-clause III benefits are reduced more thanthat individual’s benefits would have beenreduced if, holding constant the benefitformula, work history, and all other rele-vant factors used to determine the individ-ual’s benefits, those benefits were attrib-utable to service with any other employer.

IV. Treatment of Participants withService for a Subclause III EmployerWho Are Not Covered by a Make-WholeAgreement

The proposed regulations providedthat the benefits described in section432(e)(9)(D)(vii)(III) are any benefits thatare directly attributable to a participant’sservice with a subclause III employer,without regard to whether the employerhas assumed liability for providing bene-fits to the participant or beneficiary thatwere reduced as a result of the financialstatus of the plan. For example, if, beforethe date a subclause III employer enteredinto a make-whole agreement, a partici-pant commenced receiving retirementbenefits under a plan that are directly at-tributable to service with that employer,then the participant’s benefits would be

6The preamble to the proposed regulations requested comments on an alternative interpretation of section 432(e)(9)(vii) that would require that any suspension of benefits be applied toprovide for a lesser reduction in benefits that are directly attributable to service with a subclause III employer than to benefits that are attributable to any other service. No commentersrecommended adopting the alternative interpretation.

May 23, 2016 Bulletin No. 2016–21860

described in section 432(e)(9)(D)(vii)(III)even if those benefits were not covered bythe make-whole agreement. This interpre-tation is based on the statutory language insection 432(e)(9)(D)(vii)(III), which de-fines the benefits to which that subclauseapplies as those benefits that are directlyattributable to service with an employerthat has met the conditions set forth insection 432(e)(9)(D)(vii)(III)(aa) and(bb). In other words, the statutory provi-sion refers to benefits directly attributableto service with an employer described insubclause (III) and not only to benefitscovered by the make-whole agreement.

Some of the commenters on the pro-posed regulations expressed views regard-ing whether subclause III benefits shouldinclude benefits that are not covered by amake-whole agreement. Two commenterssupported the rule set forth in the pro-posed regulations, under which subclauseIII benefits include all benefits directlyattributable to service with a subclause IIIemployer. Two other commenters ex-pressed the view that subclause III bene-fits include only benefits that are coveredby a make-whole agreement. The lattertwo commenters asserted that Congressincluded this provision in order to preventa suspension from unreasonably shiftingcosts onto an employer that had enteredinto a make-whole agreement, and thatthis Congressional intent suggests thatonly benefits subject to the make-wholeagreement were intended to be protected.They also noted that interpreting this pro-vision to include benefits that are not cov-ered by a make-whole agreement couldresult in benefits for many participantsbeing covered under subclause III even ifan employer entered into a make-wholeagreement covering only a few partici-pants, and argued that Congress did notintend such a result.

After considering the public com-ments, the Treasury Department and theIRS remain convinced that the rule setforth in the proposed regulations reflectsthe plain language of the statute. The stat-ute defines subclause III benefits as bene-fits attributable to service with a subclauseIII employer, not benefits covered by amake-whole agreement. Furthermore, theability of an employer to take advantageof this interpretation by entering into amake-whole agreement that covers only a

few participants is limited by the fact thatsubclause (III) applies only if all the con-ditions of subclause (III) (including thecondition that the employer enter into amake-whole agreement) were satisfiedprior to December 16, 2014 (the date ofenactment of MPRA). Because this datehas passed, there is no cause for concernthat an employer could plan to become asubclause (III) employer. Accordingly,these regulations adopt the rule set forth inthe proposed regulations under which sub-clause III benefits include all benefits at-tributable to a participant’s service with asubclause III employer without regard towhether the participant or beneficiary iscovered by a make-whole agreement.

Effective/Applicability Dates

These regulations apply to suspensionsfor which the approval or denial is issuedon or after April 26, 2016. In the case of asystemically important plan, these regula-tions apply with respect to any modifiedsuspension implemented on or after April26, 2016.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations.

The Regulatory Flexibility Act (RFA)(5 U.S.C. chapter 6) requires an agency toconsider whether the rules it proposes willhave a significant economic impact on asubstantial number of small entities. Inthis case, the IRS and the Treasury De-partment believe that the regulationslikely would not have a “significant eco-nomic impact on a substantial number ofsmall entities.” 5 U.S.C. 605. This certifi-cation is based on the fact that the numberof small entities affected by this rule isunlikely to be substantial because it isunlikely that a substantial number of smallmultiemployer plans in critical and declin-ing status are subject to the limitation con-tained in section 432(e)(9)(D)(vii). Pursu-ant to section 7805(f) of the Code, thenotice of proposed rulemaking preceding

these regulations was submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Contact Information

For general questions regarding theseregulations, please contact the Depart-ment of the Treasury MPRA guidance in-formation line at (202) 622-1559 (not atoll-free number). For information regard-ing a specific application for a suspensionof benefits, please contact the TreasuryDepartment at (202) 622-1534 (not a toll-free number).

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.432(e)(9)–1 is

amended by revising paragraph (d)(8) toread as follows:

§ 1.432(e)(9)–1 Benefit suspensions formultiemployer plans in critical anddeclining status.

* * * * *(d) Limitations on suspension. * * *(8) Additional rules for plans de-

scribed in section 432(e)(9)(D)(vii)—(i)In general. In the case of a plan thatincludes the benefits described in para-graph (d)(8)(i)(C) of this section, any sus-pension of benefits under this sectionshall—

(A) First, be applied to the maximumextent permissible to benefits attributableto a participant’s service for an employerthat withdrew from the plan and failed topay (or is delinquent with respect to pay-ing) the full amount of its withdrawal li-ability under section 4201(b)(1) of ERISAor an agreement with the plan;

(B) Second, except as provided byparagraph (d)(8)(i)(C) of this section, beapplied to all other benefits that may besuspended under this section; and

(C) Third, be applied to benefits undera plan that are directly attributable to a

Bulletin No. 2016–21 May 23, 2016861

participant’s service with any employerthat has, prior to December 16, 2014—

(1) Withdrawn from the plan in a com-plete withdrawal under section 4203 ofERISA and paid the full amount of theemployer’s withdrawal liability under sec-tion 4201(b)(1) of ERISA or an agreementwith the plan; and

(2) Pursuant to a collective bargainingagreement, assumed liability for provid-ing benefits to participants and beneficia-ries of the plan under a separate, single-employer plan sponsored by the employer,in an amount equal to any amount ofbenefits for such participants and benefi-ciaries reduced as a result of the financialstatus of the plan.

(ii) Application of suspensions to ben-efits that are directly attributable to aparticipant’s service with certain employ-ers—(A) Greater reduction in certainbenefits not permitted. A suspension ofbenefits under this section must not beapplied to provide for a greater reductionin benefits described in paragraph(d)(8)(i)(C) of this section than the reduc-tion that is applied to benefits described inparagraph (d)(8)(i)(B) of this section. Therequirement in the preceding sentence issatisfied if no individual’s benefits that aredirectly attributable to service with an em-ployer described in paragraph (d)(8)(i)(C)of this section are reduced more than thatindividual’s benefits would have been re-duced if, holding the benefit formula,work history, and all other relevant factorsused to compute benefits constant, thosebenefits were attributable to service withan employer that is not described in para-graph (d)(8)(i)(C) of this section.

(B) Application of limitation to benefitsof participants with respect to which theemployer has not assumed liability. Ben-efits described in paragraph (d)(8)(i)(C) ofthis section include all benefits of a par-ticipant or beneficiary that are directly at-tributable to service with an employer de-scribed in paragraph (d)(8)(i)(C) of thissection without regard to whether the em-ployer has assumed liability for providingbenefits to that participant or beneficiarythat are reduced as a result of the financialstatus of the plan as described in para-graph (d)(8)(i)(C)(2) of this section. Thus,the rule of paragraph (d)(8)(ii)(A) of thissection limits the amount by which a sus-pension of benefits is permitted to reduce

benefits under a plan that are directly at-tributable to a participant’s service withsuch an employer, even if the employerhas not, pursuant to a collective bargain-ing agreement that satisfies the require-ments of paragraph (d)(8)(i)(C)(2) of thissection, assumed liability with respect tothat participant’s benefits.

John Dalrymple,Deputy Commissioner for



Mark J. Mazur,Assistant Secretary of the


(Filed by the Office of the Federal Register on May 3, 2016,4:15 p.m., and published in the issue of the Federal Registerfor May 5, 2016, 81 F.R. 27011)

26 CFR 301.7705–1T: Certified professional em-ployer organization; 26 CFR 301.7705–2T: CPEOcertification requirements.

T.D. 9768

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 301 and 602

Certified ProfessionalEmployer Organizations;Final and TemporaryRegulations

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-nal and temporary regulations relating tocertified professional employer organiza-tions (CPEOs). The Stephen Beck, Jr.,Achieving a Better Life Experience Act of2014 requires the IRS to establish a vol-untary certification program for profes-sional employer organizations. These finaland temporary regulations contain the re-quirements a person must satisfy in orderto become and remain a CPEO. The finaland temporary regulations will affect per-sons that apply to be CPEOs and are cer-tified by the IRS as meeting the applicablerequirements. The text of these final and

temporary regulations also serves, in part,as the text of the proposed regulations(REG–127561–15) set forth in the noticeof proposed rulemaking on this subject inthe Proposed Rules section of this issue ofthe Internal Revenue Bulletin.

DATES: Effective Date: These final andtemporary regulations are effective onMay 6, 2016.

Applicability Date: For date of appli-cability, see § 301.7705–2T(o).

FOR FURTHER INFORMATIONCONTACT: Melissa L. Duce at (202)317-6798 (not a toll-free number).


Paperwork Reduction Act

The collections of information con-tained in these regulations have been re-viewed and, pending receipt and evalua-tion of public comments, approved by theOffice of Management and Budget undercontrol number 1545-2266.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less the collection of information displaysa valid control number.

For further information concerning thiscollection of information, where to submitcomments on the collection of informa-tion and the accuracy of the estimatedburden, and suggestions for reducing thisburden, please refer to the preamble to thecross-referenced notice of proposed rule-making on this subject in the ProposedRules section in this issue of the InternalRevenue Bulletin.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

Overview

The Stephen Beck, Jr., Achieving aBetter Life Experience (ABLE) Act of2014, enacted on December 19, 2014, aspart of The Tax Increase Prevention Actof 2014 (Pub. L. 113–295), added new

May 23, 2016 Bulletin No. 2016–21862

sections 3511 and 7705 to the InternalRevenue Code (Code) relating to the fed-eral employment tax1 consequences andcertification requirements, respectively, ofa certified professional employer organi-zation (CPEO). The ABLE Act requiresthe IRS to establish a voluntary programfor persons to apply to become certified asa CPEO. This document contains tempo-rary regulations under section 7705 that,together with a forthcoming revenue pro-cedure that will be published in the Inter-nal Revenue Bulletin, describe the applica-tion process and certification requirementsnecessary for a person to become and re-main a CPEO.

The temporary regulations in this doc-ument apply on and after July 1, 2016, thedate the IRS will begin accepting applica-tions for CPEO certification. These tem-porary regulations, along with the forth-coming revenue procedure and theapplication forms and instructions that theIRS plans to release before July 1, 2016,provide guidance to enable persons thatwish to apply to become CPEOs to pre-pare and submit applications on and afterJuly 1, 2016, and to enable the IRS tobegin processing these applications andmake determinations as to whether to ap-prove or deny certification.

Proposed regulations published else-where in this issue of the Internal Reve-nue Bulletin provide general guidance re-garding the federal employment taxconsequences under section 3511 for per-sons certified as CPEOs and their custom-ers, as well as certain definitions undersection 7705 that are necessary to imple-ment section 3511. The proposed regula-tions also propose to adopt the temporaryregulations in this document by cross-reference.

The regulations have been divided, asdescribed, into temporary regulations andproposed regulations in order to balancethe interest in considering public com-ments on rules before they apply with thedesire to provide guidance on applicationprocedures that is effective early enoughto open the application process and imple-ment the statutory provisions.

The forthcoming revenue procedurewill prescribe the specifics of the applica-tion process for a person to become a

CPEO. In the future, the IRS intends torelease another revenue procedure thatprescribes the ongoing requirements thatCPEOs must meet to maintain certifica-tion and describes the consequences of thefailure to meet the ongoing requirements.

Professional Employer Organizations

A professional employer organization(PEO), sometimes referred to as an em-ployee leasing company, enters into anagreement with a client to perform someor all of the federal employment tax with-holding, reporting, and payment functionsrelated to workers performing services forthe client. The terms of a PEO arrange-ment typically provide that the PEO is theemployer (or “co-employer”) of the cli-ent’s employees and is responsible forpaying the employees and for the relatedfederal employment tax compliance. APEO also may manage human resources,employee benefits, workers compensationclaims, and unemployment insuranceclaims for the client. The client typicallypays the PEO a fee based on payroll costsplus an additional amount. In most cases,however, the employees working in theclient’s business are the common law em-ployees of the client for federal tax pur-poses, and the client is therefore legallyresponsible for federal employment taxcompliance.

The ABLE Act of 2014

The ABLE Act requires the IRS toestablish a voluntary certification programfor persons to become CPEOs. Section7705 provides a framework for the IRS toestablish such a program. Section 7705(a)defines a CPEO as a person who applies tobe treated as a CPEO for purposes ofsection 3511 and has been certified by theSecretary as meeting the requirements ofsection 7705(b). Being certified as aCPEO has certain federal employment taxconsequences under section 3511 that aredescribed in the proposed regulations un-der that section published in the ProposedRules section in this issue of the InternalRevenue Bulletin.

Section 7705(b) sets forth the certifica-tion requirements that a person must sat-

isfy in order to become a CPEO. Underthe statute, a person meets the require-ments of section 7705(b) if: (1) the person(and any owner, officer, and other personas may be specified in regulations) dem-onstrates that it meets such requirementsas the Secretary shall establish, includingrequirements relating to tax status, back-ground, experience, business location, andannual financial audits; (2) agrees to sat-isfy certain bond and financial review re-quirements; (3) agrees to satisfy reportingrequirements imposed by the Secretary;(4) computes its taxable income using anaccrual method of accounting unless theSecretary approves another method; (5)agrees to verify on such periodic basis asthe Secretary may prescribe that it contin-ues to meet the certification requirements;and (6) agrees to notify the Secretary inwriting (within such time as the Secretarymay prescribe) of any change that mate-rially affects the continuing accuracy ofany agreement or information that waspreviously made or provided to the IRS inorder to meet the certification require-ments.

Section 7705(c) prescribes bond andindependent financial review require-ments that a person must satisfy in orderto become and remain a CPEO. To meetthese requirements, section 7705(c)(2)provides that a CPEO must post a bondfor the payment of federal employmenttaxes (in a form acceptable to the Secre-tary) that is in an amount at least equal toa specified amount. This specified amountis, for the period beginning on April 1 ofany calendar year through March 31 of thefollowing calendar year, the greater of fivepercent of the CPEO’s liability under sec-tion 3511 in the preceding calendar year(but not more than $1,000,000) or$50,000.

Under section 7705(c)(3)(A), a CPEOmust, as of the most recent audit date,cause to be prepared and provided to theSecretary (in such manner as the Secretarymay prescribe) an opinion of an indepen-dent certified public accountant (CPA) asto whether the CPEO’s financial state-ments are presented fairly in accordancewith generally accepted accounting prin-ciples (GAAP). Section 7705(c)(6) statesthat the audit date for these purposes is six

1For purposes of this preamble, “federal employment taxes” refers to taxes imposed under subtitle C of the Code.

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months after the completion of theCPEO’s fiscal year.

Section 7705(c)(3)(B) requires aCPEO to provide to the Secretary, by thelast day of the second month beginningafter the end of each calendar quarter, anassertion that the CPEO has withheld andmade deposits of all federal employmenttaxes (other than Federal UnemploymentTax Act (FUTA) taxes under chapter 23of the Code) and an examination levelattestation from an independent CPA thatstates this assertion is fairly stated in allmaterial respects.

Section 7705(d) gives the Secretary theauthority to suspend or revoke the certifi-cation of any person for purposes of sec-tion 3511 if the Secretary determines thatsuch person is not satisfying the agree-ments or requirements of sections 7705(b)or (c), or fails to satisfy applicable ac-counting, reporting, payment, or depositrequirements. Section 7705(f) providesthat the Secretary shall make available tothe public the name and address of eachperson certified as a CPEO and each per-son whose certification is suspended orrevoked.

November 2015 IRS Request forInformation on PEO Industry Practices

In an effort to streamline the imple-mentation of a new federal CPEO pro-gram and better understand the potentialimpact of such a program on the PEOindustry, on November 17, 2015, the IRSrequested information from the public re-garding certain PEO industry practices.See IRS News Release IR–2015–127. Inparticular, the IRS requested informationon current PEO industry practices relatingto financial audits, verification of payrolltax obligations, working capital and networth requirements, and covered employ-ees. In response to the IRS request forinformation, the IRS received commentsfrom seven taxpayers, which were consid-ered in developing the temporary regula-tions.


1. Applicable Definitions

The temporary regulations define aCPEO as a person that applies to be cer-tified as a CPEO in accordance with the

temporary regulations and has been certi-fied by the IRS as meeting the require-ments under those regulations. Consistentwith section 7705(b), most of the require-ments in these temporary regulations ap-ply both to persons that have been certi-fied as CPEOs and to any person that hasapplied to be certified and whose applica-tion for certification is pending with theIRS (referred to in the temporary regula-tions as “CPEO applicants”).

Section 7705(b)(1) provides that theSecretary may establish requirements forcertification that apply not only to theCPEO applicant or CPEO, but also to“any owner, officer, and other persons asmay be specified in regulations.” Accord-ingly, the temporary regulations contain anumber of requirements that apply to cer-tain owners, officers, and other individu-als (referred to in the regulations as “re-sponsible individuals”), as well as certainpersons that are related to the CPEO (re-ferred to as “related entities” and “precur-sor entities”). The remainder of this sec-tion 1 of the preamble explains thedefinitions of these categories of persons.

a. Responsible individual

The temporary regulations generallydefine a responsible individual as an indi-vidual in any of the following categorieswith respect to the CPEO applicant orCPEO: (1) certain owners; (2) directorsand officers; (3) individuals with ultimateresponsibility for implementing the deci-sions of the organization’s governingbody; (4) individuals with ultimate re-sponsibility for the organization’s man-agement and operations; (5) individualswith ultimate responsibility for managingthe organization’s finances; (6) managingmembers or general partners; (7) the soleproprietor of a sole proprietorship; and (8)any other individuals with primary re-sponsibility for federal employment taxcompliance of the organization.

With respect to determining whetheran individual is a responsible individualby reason of ownership, the temporaryregulations specify that, in the case of aCPEO applicant or CPEO that is a corpo-ration, a responsible individual includesany individual who owns 33 percent ormore of the total combined voting powerof all classes of stock of the corporation

entitled to vote or the total value of sharesof all classes of stock of the corporation.In the case of a CPEO applicant or CPEOthat is a partnership (defined in the tem-porary regulations as a business entity thatis classified as a partnership for federal taxpurposes under §§ 301.7701–1,301.7701–2, and 301.7701–3), a responsi-ble individual includes any individualwho owns 33 percent or more of the prof-its interest or capital interest in the part-nership. In both cases, ownership may bedirect or indirect and is determined byapplying the constructive ownership rulesof section 1563(e) with respect to stockownership and by substituting the term“interest” for the term “stock” and theterm “partnership” for the term “corpora-tion” used in that section, as appropriatefor purposes of determining whether aninterest in a partnership is indirectlyowned by any person. The Department ofthe Treasury (Treasury Department) andthe IRS request comments regarding theadministrability of applying the definitionof responsible individual with respect toownership of profits interests in a partner-ship, the value of which may fluctuateover time.

With respect to directors and officersof the CPEO applicant or CPEO, the tem-porary regulations provide that a directoris any voting member of the governingbody (such as the board of directors). Anofficer is determined by reference to theorganization’s organizing document, by-laws, or resolutions, or is otherwise des-ignated consistent with state law (and of-ten includes an organization’s president,vice-president, treasurer, and secretary).

The temporary regulations also providethat a responsible individual includes anyindividual who, regardless of title, has ul-timate responsibility for: (1) implement-ing the decisions of the organization’sgoverning body (typically, the chief exec-utive officer (CEO), executive director, orpresident); (2) supervising the manage-ment, administration, or operation of theorganization (typically, the chief operat-ing officer (COO)); or (3) managing theorganization’s finances (typically, thechief financial officer (CFO) or treasurer).Any individual who serves with the titlesof executive director, president, CEO,COO, CFO, or treasurer will be consid-ered to have the ultimate responsibilities

May 23, 2016 Bulletin No. 2016–21864

that are consistent with that title. The tem-porary regulations also provide that anindividual with this ultimate responsibilitymay include an individual who is nottreated as an employee of the CPEO ap-plicant or CPEO.

b. Related entity

The temporary regulations define a re-lated entity of a CPEO applicant or CPEOas including any person that is a memberof a controlled group (within the meaningof sections 414(b) and (c) and the regula-tions thereunder, with two adjustments) ofwhich the CPEO is also a member. Sec-tion 414(b) incorporates by reference thecontrolled group definitions in section1563. Likewise, the regulations prescribedunder section 414(c) — §§ 1.414(c)–2 and1.414(c)–3 — rely on principles that aresubstantially similar to the controlledgroup definitions in section 1563. How-ever, with respect to persons that are notproviders of employment-related services,the temporary regulations substitute“more than 50 percent” for “at least 80percent” in each place the term appears insection 1563(a) and § 1.414(c)–2. For per-sons that are providers of employment-related services, the temporary regulationssubstitute “more than 5 percent” for “atleast 80 percent” in each place the termappears in section 1563(a) and§ 1.414(c)–2. The temporary regulationsdefine a provider of employment-relatedservices as a person that provides payrollor other employment tax administrationand compliance services to clients, includ-ing, but not limited to, collecting, report-ing, and paying employment taxes withrespect to wages or compensation paid bythe provider of employment-related ser-vices to individuals performing servicesfor the clients. A provider of employment-related services includes, but is not limitedto, a PEO and a CPEO.

A related entity of a CPEO applicant orCPEO also includes any provider ofemployment-related services if a majorityof the directors or a majority of the offi-cers of the CPEO applicant or CPEO arealso directors or officers, respectively, ofthe provider of employment-related ser-

vices. Finally, a related entity includesany provider of employment-related ser-vices with an owner who is a responsibleindividual of both the provider ofemployment-related services and theCPEO applicant or CPEO by virtue of theindividual’s ownership percentage.

c. Precursor entity

The temporary regulations generallydefine a precursor entity as including anyrelated entity of a CPEO applicant that isor was a provider of employment-relatedservices and has ceased operations, dis-solved, or made a substantial asset transferto the CPEO applicant during the calendaryear that the CPEO applicant applies forcertification or any of the three precedingcalendar years. A precursor entity alsoincludes a related provider ofemployment-related services that plans tomake a substantial asset transfer to theCPEO applicant while the application forcertification is pending or in the 12-monthperiod following the date of the CPEOapplicant’s application.

For this purpose, the temporary regu-lations define a substantial asset transferas any transfer of 35 percent or more ofthe value of the transferor’s operating as-sets, whether through one or a series oftransactions and whether accomplishedthrough sale, lease, gift, assignment, suc-cession, merger, consolidation, corporateseparation, or any other means. The tem-porary regulations further provide that op-erating assets include both tangible andintangible resources related to the conductof the transferor’s trade or business, in-cluding but not limited to such intangibleassets as contracts, agreements, receiv-ables, employees, and goodwill (which in-cludes the value of a trade or businessbased on expected continued customer pa-tronage due to its name, reputation, or anyother factors). In the case of a contractdescribed in section 7705(e)(2) or serviceagreement described in § 31.3504–2(b)(2)2 with a provider of employment-related services, even if the contract oragreement is not sold, gifted, assigned, orotherwise formally transferred to a CPEOapplicant, it will be considered transferred

from a person to the CPEO applicant if theperson entered into the contract or agree-ment but the CPEO applicant reports,withholds, or pays, under its employeridentification number (EIN), any applica-ble federal employment taxes with respectto the wages of any individuals coveredby the contract or agreement.

Finally, the temporary regulations con-tain a rule for purposes of determiningwhether a provider of employment-relatedservices that has ceased operations, dis-solved, or made a substantial asset transferto a CPEO applicant is a related entity ofthe CPEO applicant. Specifically, the pro-vider of employment-related services is arelated entity of a CPEO applicant if itwould be or would have been a relatedentity of the CPEO applicant as describedin section 1.b of the preamble at the timeof the provider’s ceasing of operations,dissolution, or substantial asset transfer,as applicable. This determination is basedon the provider’s ownership and respon-sible individuals at the time of its ceasingof operations, dissolution, or substantialasset transfer, as applicable, and the own-ership and responsible individuals of theCPEO applicant at the time of its applica-tion.

2. Application Process and EffectiveDate of Certification

The temporary regulations provide thatin order to be certified, a CPEO applicantmust submit a properly completed andexecuted application to the IRS. In addi-tion, the CPEO applicant’s responsible in-dividuals must also submit the informa-tion required by the regulations and infurther guidance.

The IRS will notify the CPEO appli-cant as to whether its application for cer-tification has been approved or denied andthe effective date of its certification. If theIRS denies the application, the IRS willinform the CPEO applicant of the rea-son(s) for denial. The temporary regula-tions also state that if the IRS approves aCPEO applicant’s application for certifi-cation, the IRS will make available to thepublic the name and address of the CPEO,

2A service agreement described in § 31.3504–2(b)(2) is a written or oral agreement pursuant to which the payor: (1) asserts it is the employer (or “co-employer”) of individuals performingservices for the client; (2) pays wages or compensation to the individuals for services the individuals perform for the client; and (3) assumes responsibility to collect, report, and pay, orassumes liability for, any employment taxes with respect to the wages or compensation paid by the payor to the individuals performing services for the client.

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as well as the effective date of its certifi-cation.

3. Requirements for Certification

Section 7705(b)(1) provides that, to be-come and remain certified as a CPEO,3 aperson, as well as any owner, officer, orother person specified in regulations(which, in the temporary regulations, isany responsible individual, related entity,or precursor entity), must meet such re-quirements as the Secretary shall establishin order for the person to be certified,including requirements with respect to taxstatus, background, experience, businesslocation, and annual financial audits. Thetemporary regulations elaborate upon therequirements that a CPEO applicant andCPEO must meet in each of these catego-ries to become and remain certified.

The temporary regulations provide thatthe IRS may deny a CPEO applicant’sapplication for certification or revoke orsuspend a CPEO’s certification if a CPEOapplicant or CPEO, or any of the precur-sor entities, related entities, or responsibleindividuals of the CPEO applicant orCPEO, fails to meet any applicable re-quirement described in the regulations orother applicable guidance. The temporaryregulations also provide that the IRS willdeny a CPEO applicant’s application forcertification or revoke or suspend aCPEO’s certification if the IRS deter-mines, in its sole discretion, that such fail-ure presents a material risk to the IRS’scollection of federal employment taxes. Indetermining whether one or more failuresto meet the requirements described in theregulations presents a material risk to theIRS’s collection of federal employmenttaxes, the IRS will generally consider allrelevant facts and circumstances, includ-ing the size, scope, nature, significance,recurrence, and timing of and reason forthe failure(s), and, in the case of a CPEO,any prior failures of the CPEO to meet therequirements of this section.

a. Suitability

The Treasury Department and the IRSview tax compliance of the CPEO appli-cant or CPEO, and of its responsible in-dividuals, related entities, and precursorentities, as an important factor in deter-mining whether the CPEO applicant’s orthe CPEO’s certification presents a mate-rial risk to the IRS’s collection of federalemployment taxes. Therefore, the tempo-rary regulations provide that the IRS maydeny an application for certification, orsuspend or revoke a CPEO’s certification,if the CPEO applicant or CPEO, or any ofits precursor entities, related entities, orresponsible individuals, has failed to payany applicable federal, state, or local taxesor file any required federal, state, or localtax or information returns in a timely andaccurate manner, unless the failure to fileor failure to pay is determined to be due toreasonable cause and not to willful ne-glect. In addition, the temporary regula-tions provide that a CPEO must be a busi-ness entity described in § 301.7701–2(a)except that it may not be a disregardedentity for federal tax purposes under§§ 301.7701–2 and 301.7701–3 (withoutregard to the special rule in § 301.7701–2(c)(2)(iv) that provides that such entitiesare corporations for federal employmenttax purposes). Under § 301.7701–2(a), abusiness entity is any entity recognizedfor federal tax purposes that is not prop-erly classified as a trust under§ 301.7701–4 or otherwise subject to spe-cial treatment under the Code.

The Treasury Department and the IRSconsider the criminal background of aCPEO applicant or CPEO and its respon-sible individuals to present a material riskto tax compliance and, therefore, the ab-sence of such criminal background is an-other important requirement for certifica-tion. Consistent with section 7705(b)(1),which includes background as a categorywith respect to which the IRS may estab-lish requirements for certification, thetemporary regulations state that the IRSmay deny an application for certification,or suspend or revoke a CPEO’s certifica-tion, if the CPEO applicant or CPEO, or

any of its precursor entities, related enti-ties, or responsible individuals, has beencharged or convicted of any criminal of-fense under the laws of the United Statesor of a state or political subdivisionthereof, or is the subject of an active IRScriminal investigation. This is also consis-tent with suggestions made by the JointCommittee on Taxation, which noted thatthe regulations under section 7705(b)(1)could include requirements for favorablecriminal background checks. See Staff ofthe Joint Committee on Taxation (JCS),General Explanation of Tax LegislationEnacted in the 113th Congress, JCS–1–15, at 233 (March 2015) (General Expla-nation). Additionally, the IRS may con-sider whether the CPEO applicant orCPEO, or any precursor entities, relatedentities, or responsible individuals of theCPEO applicant or CPEO, is listed on anysanctions list compiled by the Office ofForeign Assets Control (OFAC) withinthe Department of Treasury, including butnot limited to the OFAC ConsolidatedSanctions List and the OFAC SpeciallyDesignated Nationals (SDN) List.

The temporary regulations furtherstate, consistent with section 7705(b)(1),that the IRS may deny a CPEO applicant’sapplication for certification, or suspend orrevoke a CPEO’s certification, if theCPEO applicant or CPEO, or any of itsprecursor entities, related entities, or re-sponsible individuals, has been sanctionedor had a license, registration, or accredi-tation (including a license, registration, oraccreditation relating to its status or abil-ity to operate as a PEO) denied, sus-pended, or revoked by a court of compe-tent jurisdiction, licensing board,assurance or other professional organiza-tion, or federal or state agency, court,body, board, or other authority for anymisconduct that bears upon the suitabilityof the CPEO applicant or CPEO to per-form its professional functions. Such mis-conduct may relate to dishonesty, fraud,or breach of trust and would include anycriminal or civil penalties for violatingany state laws prohibiting the transfer oracquisition of a business solely or primar-ily for the purpose of obtaining a lower

3Section 7705(a)(1) provides that a person must be certified by the Secretary as meeting the requirements of section 7705(b) to become certified as a CPEO, and section 7705(b)(5) providesthat the person must agree to verify that it continues to meet the requirements of section 7705(b) on such periodic basis as the Secretary may prescribe. In addition, section 7705(d) providesthat the Secretary may suspend or revoke a certification of any person if the Secretary determines that such person is not satisfying the agreements or requirements of section 7705(b)(including the CPEO’s agreement to verify that it continues to meet the requirements of section 7705(b) that it makes pursuant to section 7705(b)(5)).

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unemployment tax rate or avoiding ahigher unemployment tax rate.

In addition, the temporary regulationsprovide that the IRS may deny a CPEOapplicant’s application for certification, orrevoke or suspend a CPEO’s certification,if the CPEO applicant or CPEO, or any ofits precursor entities, related entities, orresponsible individuals, fails to demon-strate a history of financial responsibility,which the IRS may assess through checkson credit history and other similar indica-tors.

With respect to the requirements relat-ing to experience referred to in section7705(b)(1), the Treasury Department andthe IRS consider it important that a CPEOapplicant or CPEO be managed by indi-viduals with knowledge or experience re-garding federal and state employment taxcompliance and business practices relat-ing to those compliance requirements.This is consistent with the suggestionsmade by the Joint Committee on Taxation.See General Explanation at 233. The tem-porary regulations provide that the IRSmay deny a CPEO applicant’s applicationfor certification or revoke or suspend aCPEO’s certification if the CPEO appli-cant or CPEO and its responsible individ-uals fail to demonstrate adequate collec-tive knowledge or experience with respectto federal or state employment tax report-ing, depositing, and withholding require-ments; handling and accounting of pay-roll, tax payments, and other funds onbehalf of others; effective recordkeepingsystems; retention of qualified personneland legal advisors; and general businessand risk management.

The temporary regulations provide thatthe IRS may deny a CPEO applicant’sapplication for certification, or revoke orsuspend a CPEO’s certification, if theCPEO applicant or CPEO, or any of itsresponsible individuals, gives false ormisleading information (including by in-tentionally omitting relevant information)or participates in any way in the giving offalse or misleading information, to theIRS, knowing, or having reason to know,the information to be false or misleading.For these purposes, the term “informa-tion” includes: facts or other matters con-

tained in testimony, federal tax returns,and financial statements and opinions re-garding such statements; applications forcertification (and all accompanying docu-mentation); affidavits, declarations, asser-tions, attestations, statements, and agree-ments; periodic verifications that therequirements of this section continue to bemet; and any other information that isrequired to be provided by these tempo-rary regulations, section 3511 and the reg-ulations thereunder, or further guidance.

In order to confirm the accuracy ofinformation provided to the IRS with re-spect to these requirements, the temporaryregulations require the CPEO applicant orCPEO, and each of its responsible indi-viduals, to take such actions as are neces-sary to authorize the IRS to investigate theaccuracy of statements and submissionsmade by the CPEO applicant or CPEO,including waiving confidentiality andprivilege when necessary, and to conductcomprehensive background checks, in-cluding, but not limited to, checks on taxcompliance, criminal background, profes-sional experience (including through thecontact of third-party references), credithistory, and professional sanctions. In ad-dition, each responsible individual of aCPEO applicant or CPEO must submitfingerprints in the time and manner andunder the circumstances prescribed by theCommissioner in further guidance. TheIRS is considering whether to expand thecategory of individuals who must autho-rize the IRS to conduct comprehensivebackground checks and submit fingerprintcards to include certain directors, officers,and owners of a CPEO applicant’s orCPEO’s related entities. Treasury and theIRS request comments regarding suchpossible expansion, including how anysuch expansion could be as administrableas possible. To submit comments, pleasefollow the instructions in the “Commentsand Requests for Public Hearing” sectionin the notice of proposed rulemaking onthis subject in the Proposed Rules sectionof this issue of the Internal Revenue Bul-letin.

b. Business location

Section 7705(b)(1) specifically listsbusiness location as one of the categoriesof certification requirements that the Sec-retary may establish. The temporary reg-ulations require a CPEO applicant orCPEO to have one or more establishedphysical business locations in the UnitedStates at which regular operations thatconstitute a trade or business within theUnited States (within the meaning of sec-tion 864(b)) take place and at which asignificant portion of its CPEO-relatedfunctions are carried on and the adminis-trative records relating to those functionsare kept.4 The temporary regulations alsorequire the CPEO applicant or CPEO tobe created or organized in the UnitedStates or under the law of the UnitedStates or of any state. The temporary reg-ulations further require that a majority ofthe CPEO applicant’s or CPEO’s respon-sible individuals be citizens or residents ofthe United States. Finally, a CPEO appli-cant or CPEO must use only financialinstitutions described in section 265(b)(5)to hold its cash and cash equivalents, re-ceive payments from customers, and paywages and federal employment taxes. Un-der section 265(b)(5), a financial institu-tion is, among other requirements, a per-son who is subject to federal or statesupervision as a financial institution or abank or trust company that is subject tosupervision and examination by state orfederal authority having supervision overbanking institutions.

c. Financial statements

In addition to the specific requirementswith respect to financial statements in sec-tion 7705(c), section 7705(b)(1) providesthat the Secretary may establish require-ments with respect to annual financial au-dits. Pursuant to these provisions, the tem-porary regulations require a CPEOapplicant to provide to the IRS, with itsapplication, a copy of its annual auditedfinancial statements for the most recentlycompleted fiscal year as of the date itapplies for certification. If a CPEO appli-cant applies for certification before the

4This requirement is consistent with the General Explanation, which provides that “the existence of an established business location within the United States at which significant operationsregularly take place” is a business location requirement that the Secretary could impose. General Explanation, at 234.

Bulletin No. 2016–21 May 23, 2016867

last day of the sixth month following itsmost recently completed fiscal year, andthe audit of the financial statements forthis fiscal year has not yet been completedat the time of application, a CPEO appli-cant must also provide to the IRS a copyof its audited financial statements for theimmediately preceding fiscal year, if any.The temporary regulations provide thatthe CPEO applicant must subsequentlyprovide to the IRS the financial statementsfor the most recently completed fiscal yearby the last day of the sixth month aftersuch fiscal year ends. In addition, for anyfiscal year that ends after the CPEO ap-plicant applies for certification and on orbefore the effective date of certification, ifapplicable, the CPEO applicant must pro-vide the audited financial statements bythe last day of the sixth month after suchfiscal year ends. The obligation to providethe audited financial statements describedin the preceding sentence continues to ap-ply after the CPEO applicant is certified asa CPEO. Once certified, pursuant to sec-tion 7705(b)(1), a CPEO is required by thetemporary regulations to provide a copyof its annual audited financial statementsto the IRS within six months of the end ofeach fiscal year (beginning with the firstfiscal year that ends after the CPEO’s ef-fective date of certification). For thesepurposes, a CPEO applicant’s or CPEO’sfiscal year will be considered completedonce the last day of that fiscal year hasended, even if the CPEO was not operat-ing or certified for the full fiscal year orthe fiscal year was a short year consistingof fewer than 12 months.

Additionally, the Treasury Departmentand the IRS believe a CPEO with annualaudited financial statements that reflectpositive working capital (as determined inaccordance with GAAP) presents a mate-rially lower risk to the IRS’s collection offederal employment taxes than a CPEOwithout such financial statements. Ac-cordingly, pursuant to section 7705(b)(1)and consistent with several state PEO cer-tification and registration laws, the tempo-rary regulations require a CPEO applicantor CPEO to cause to be prepared andprovided to the IRS, by the same date itmust provide a copy of its annual auditedfinancial statements, an opinion of an in-dependent CPA that such financial state-ments reflect positive working capital for

the fiscal year, unless the exception de-scribed in the next paragraph applies. Inaddition, the temporary regulations re-quire this opinion to set forth in detail acalculation of the CPEO applicant’s orCPEO’s working capital. Consistent withsection 7705(c)(3)(A), this CPA opinionmust also generally state that the financialstatements are presented fairly in accor-dance with GAAP.

The Treasury Department and the IRSrecognize that working capital may fluc-tuate over the course of a CPEO’s fiscalyear due to normal business operations.To allow for some fluctuation in workingcapital, the temporary regulations containan exception to the positive working cap-ital requirement. Under this exception, aCPEO applicant or CPEO will not fail tomeet the positive working capital require-ment if three requirements are satisfied.First, the CPEO applicant or CPEO musthave negative working capital for no morethan two consecutive fiscal quarters ofthat fiscal year (as demonstrated by thefinancial statements for the final fiscalquarter of the fiscal year or the quarterlystatements described in this section 3.c ofthe preamble for any other fiscal quarter).Second, the CPEO applicant or CPEO orits CPA must provide an explanation tothe IRS describing the reason for the fail-ure in such time and manner as the Com-missioner may prescribe in further guid-ance. Third, the IRS must determine, in itssole discretion, that the failure does notpresent a material risk to the IRS’s collec-tion of federal employment taxes.

The temporary regulations providespecial rules for newly established CPEOapplicants. A CPEO applicant that was notoperating as a provider of employment-related services for all or part of the mostrecently completed fiscal year as of thedate it applies for certification must alsoprovide a copy of the audited financialstatements of any precursor entity for theprecursor entity’s most recently com-pleted fiscal year as of the date of theapplication for certification, as well as aCPA opinion that these financial state-ments demonstrate positive working cap-ital and are presented fairly in accordancewith GAAP. The financial statements andCPA opinion for a precursor entity mustbe provided in such time and manner as

the Commissioner may prescribe in fur-ther guidance.

In accordance with section 7705(c)(3)(A),the temporary regulations require theopinion regarding a CPEO’s financialstatements to be provided by a CPA whois independent of the CPEO. For this pur-pose, the temporary regulations require aCPA to be independent as prescribed bythe American Institute of Certified PublicAccountants’ Professional Standards,Code of Professional Conduct, and its in-terpretations and rulings. The TreasuryDepartment and the IRS request com-ments regarding whether the CPA inde-pendence guidelines or requirements ofother governmental agencies or depart-ments or industry self-regulatory bodies,as adapted for a CPA of a CPEO, wouldbetter ensure the impartiality of CPAsproviding opinions on CPEO’s financialstatements, such as: (1) the Department ofLabor’s guidelines on the independence ofCPAs retained by employee benefit plansunder 29 CFR 2509.75–9; (2) the Securi-ties and Exchange Commission’s (SEC)independence guidelines for auditors re-porting on financial statements included inSEC filings; and (3) the Government Ac-countability Office’s auditor indepen-dence requirements under GovernmentAuditing Standards that cover federal en-tities and organizations receiving federalfunds.

As previously noted, section 7705(b)(5)requires a CPEO to verify on a periodicbasis that it meets certification requirements.In accordance with this requirement andpursuant to the Secretary’s general authorityunder section 7705(b)(1) to establish re-quirements for CPEOs to become and re-main certified, the temporary regulationsfurther require a responsible individual ofthe CPEO applicant or the CPEO to pro-vide, by the last day of the second monthafter the end of each calendar quarter andbeginning with the most recently completedquarter as of the date of the application forcertification, a statement verifying underpenalties of perjury that the CPEO applicantor the CPEO has positive working capitalwith respect to the most recently completedfiscal quarter. However, as with the require-ment that annual financial statements reflectpositive working capital, the temporary reg-ulations also contain an exception to thisrequirement. The exception applies only if

May 23, 2016 Bulletin No. 2016–21868

the CPEO does not have negative workingcapital at the end of the two fiscal quartersimmediately preceding the fiscal quarter towhich the statement relates. As with theexception provided with respect to annualfinancial statements that reflect negativeworking capital, the CPEO must also pro-vide an explanation to the IRS describingthe reason for the failure in such time andmanner as the Commissioner may prescribein further guidance, and the IRS must deter-mine, in its sole discretion, that the failuredoes not present a material risk to the IRS’scollection of federal employment taxes.

d. Quarterly assertion and attestation

Section 7705(c)(3)(B) requires aCPEO to provide to the Secretary an as-sertion and examination level attestationregarding its compliance with federal em-ployment tax withholding and depositingrequirements. In accordance with this pro-vision, the temporary regulations state thata CPEO must provide, on a quarterly basisand beginning with the first calendar quar-ter that ends after the CPEO’s effectivedate of certification, an assertion signedby a responsible individual under penal-ties of perjury stating that the CPEO haswithheld and made deposits of all federalemployment taxes (other than taxes im-posed by chapter 23 of the Code) as re-quired for the quarter.5 In addition, theCPEO must provide an examination levelattestation from a CPA stating that thisassertion is fairly stated. The assertion andattestation must be provided by the lastday of the second month after the end ofeach calendar quarter. These quarterly as-sertion and attestation requirements alsoapply to a CPEO applicant, who mustprovide the required assertion and attesta-tion for the most recently completed cal-endar quarter as of the date of its applica-tion for certification and each subsequentcalendar quarter while its application ispending. A CPEO applicant that was notoperating as a provider of employment-related services during the most recentlycompleted calendar quarter as of the dateof its application for certification or dur-

ing any quarter that ends while its appli-cation for certification is pending mustprovide an assertion and attestation forany precursor entity in such time andmanner as the Commissioner may pre-scribe in further guidance.

The temporary regulations provide thata CPEO applicant or CPEO will not fail tomeet the quarterly assertion and attesta-tion requirements if the CPA examinationlevel attestation indicates that the CPEOapplicant or CPEO has failed to withholdor make deposits in certain immaterialrespects, provided that the attestation in-cludes a summary of the immaterial fail-ures that were found and states that thefailures were immaterial and isolated anddo not reflect a meaningful lapse in com-pliance with federal employment tax with-holding and deposit requirements. Fur-thermore, in order for this exception forimmaterial failures to apply, the IRS mustdetermine, in its sole discretion, that theisolated and immaterial failures identifiedby the CPA do not present a material riskto the IRS’s collection of federal employ-ment taxes.

e. Bond requirements

Section 7705(c)(2) sets forth the bondrequirements that a person must satisfy inorder to become and remain a CPEO. Theprovisions of section 7101 and its accom-panying regulations apply to bonds re-quired by section 7705(c)(2), except to theextent modified in the temporary regula-tions. The temporary regulations providethat a CPEO must post a bond for thepayment of federal employment taxes in aspecified amount. This specified amountis, for each period beginning on April 1 ofany calendar year (or, in the case of anewly certified CPEO, on the effectivedate of certification) and ending on March31 of the following calendar year (thebond period), an amount that is at leastequal to the greater of: (1) five percent ofthe CPEO’s liability under section 3511(or, if applicable, the liability as deter-mined for newly certified CPEOs, dis-cussed in section 3.e.i of this preamble)

during the calendar year preceding thebond period, but not more than$1,000,000; or (2) $50,000. The proposedregulations require the bond to be issuedby a surety company that holds a certifi-cate of authority from the Secretary as anacceptable surety on federal bonds andmeets such other requirements as theCommissioner may prescribe in furtherguidance.

One benefit of the bond requirement insection 7705(c) is that the CPEO mustsubmit to the bonding surety’s financialunderwriting process to obtain the bond,which provides the IRS with a certainlevel of assurance concerning the financialcondition of the CPEO. The Treasury De-partment and the IRS believe that thisbenefit is substantially diminished if theCPEO obtains the bond by posting collat-eral in the amount of the bond. For thisreason, the temporary regulations providethat the CPEO must meet the bond re-quirements without posting collateral.

i. Calculating Five Percent of Liabilityunder Section 3511

In calculating five percent of its liabil-ity under section 3511 (or, if applicable,the liability described in the subsequentparagraph) during the preceding calendaryear, the temporary regulations requirethat a CPEO base its calculation on theamount of applicable federal employmenttaxes6 it reported and paid in the preced-ing calendar year. However, if the CPEOor the IRS subsequently determines thatthe applicable federal employment tax li-ability for the preceding calendar year washigher than the amount reported and paid(and makes an adjustment or assessment,respectively, reflecting that determina-tion), and if the bond that the CPEO hadposted was less than $1,000,000, theCPEO must post a strengthening bondthat, together with the initially-postedbond, equals a total amount that reflectsthe adjusted applicable federal employ-ment tax liability up to $1,000,000. Alter-natively, the CPEO could post a supersed-ing bond in such an adjusted amount.

5Although the temporary regulations (and section 7705(c)(3)(B)) do not require the assertion to include a statement with respect to taxes imposed by chapter 23 of the Code, the IRS expectsto evaluate compliance with deposit requirements with respect to taxes imposed by chapter 23 through tax compliance checks.

6As noted in the Background section of this preamble, the term “federal employment taxes” includes all taxes imposed under Subtitle C of the Code, including income tax withholding andFICA, RRTA, and FUTA taxes. As such, the liability described in this paragraph is based on an amount that includes both the employee and employer shares of FICA and RRTA, as wellas income tax withholding and FUTA.

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A newly certified CPEO will not haveany liability under section 3511 for thecalendar year preceding its certification onwhich to base its calculation of the re-quired bond amount. In such cases, thetemporary regulations provide that, in cal-culating the bond amount, the liabilityused for the preceding calendar year (orportion thereof7) when the CPEO was notcertified is the federal employment taxliability of the CPEO8 and of any precur-sor entity of the CPEO that made a sub-stantial asset transfer to the CPEO, thatresults from one or more service agree-ments described in § 31.3504–2(b)(2). Indetermining the federal employment taxliability of a precursor entity of a CPEOfor a preceding year, only liabilityamounts that resulted from service agree-ments that were transferred or are in-tended to be transferred to the CPEO (atthe time that the amount of the bond isdetermined) are included. If no such pre-cursor entity exists and the CPEO other-wise had no federal employment tax lia-bility during the preceding calendar year,the amount of the bond will be $50,000.

ii. Cancellation

The temporary regulations provide thatthe bond posted by a CPEO must providethat it may be cancelled by the surety onlyafter the surety gives written notice to theIRS and the CPEO. (See Form 14751,“Certified Professional Employer Organi-zation Surety Bond,” for details on thetime and manner in which such writtennotice must be provided.) The bond mustalso provide that, if the surety cancels thebond without issuing a superseding bondto the CPEO, the surety will remain liablefor all federal employment tax liabilityaccrued by the CPEO during the periodbeginning with the effective date of thefirst bond issued by the surety to theCPEO in any consecutive series of bondsissued by that surety prior to cancellationand ending with the cancellation (the totalbond period), up to the penal amount ofthe bond at the time of cancellation. Thetemporary regulations provide that a can-celling surety will remain liable for fed-

eral employment tax liability accrued dur-ing the total bond period up to the penalamount of the bond for as long as theCommissioner may assess and collecttaxes for such period under sections 6501and 6502.

4. Controlled Groups

The temporary regulations provide thatCPEO applicants and CPEOs that aremembers of a controlled group, within themeaning of sections 414(b) and (c), willbe treated as a single CPEO applicant orCPEO for purposes of the financial state-ment, quarterly assertion and attestation,and bond requirements described in thispreamble, except that the annual and quar-terly requirements imposed under thescope of sections 7705(b)(1) and7705(b)(5) with respect to positive work-ing capital apply to each CPEO applicantor CPEO on a separate basis.

5. Consents to Disclose

In order to receive and maintain certi-fication, the temporary regulations statethat a CPEO applicant or CPEO must pro-vide such consents for the IRS to discloseconfidential tax information to its custom-ers, and to other persons as necessary tocarry out the purposes of these regula-tions, that relates to its certification andobligations to report, deposit, and pay fed-eral employment taxes as the Commis-sioner may require in further guidance.

6. Periodic Verification and Notificationof Material Changes

Consistent with section 7705(b)(5), thetemporary regulations require a CPEO toverify periodically that it continues tomeet the certification requirements in suchtime and manner as the Commissionermay prescribe in further guidance. Con-sistent with section 7705(b)(6), the tem-porary regulations provide that a CPEOapplicant or CPEO must notify the IRS, inthe time and manner prescribed by theCommissioner in further guidance, of anychange that materially affects the continu-

ing accuracy of any agreement or infor-mation that was previously made or pro-vided to the IRS. The TreasuryDepartment and the IRS expect to providefurther details regarding these require-ments in a future revenue procedure thatwill prescribe the ongoing requirementsthat CPEOs must meet to maintain certi-fication.

7. Accrual Method of Accounting

Consistent with section 7705(b)(4), thetemporary regulations require a CPEO tocompute its taxable income using an ac-crual method of accounting or, if applica-ble, another method that the Commis-sioner prescribes in further guidance.

8. Compliance with ReportingObligations

The temporary regulations provide thata CPEO must make reports to the IRS andto its clients as provided in section3511(g) and regulations issued thereun-der. This includes the filing of all federalemployment tax and information returns.The temporary regulations also require aCPEO to file all returns, schedules, re-ports, and other forms and documents onmagnetic media when required to do so bysection 3511(g) and regulations issuedthereunder, or by other Treasury regula-tions. With respect specifically to the re-quirement that CPEOs file Form 940,“Employer’s Annual Federal Unemploy-ment (FUTA) Tax Return,” and Form941, “Employer’s QUARTERLY FederalTax Return,” on magnetic media, compli-ance with this requirement is a conditionof certification. The CPEO program is avoluntary certification regime; a personthat does not wish to file Forms 940 and941 on magnetic media is not obligated toapply for or obtain certification as aCPEO.

9. Suspension and Revocation

The temporary regulations provide thatthe IRS may suspend or revoke the certi-fication of any CPEO as a result of a

7Unless the CPEO is certified effective January 1, the CPEO will not have liability under section 3511 for the portion of the calendar year in which it was certified that preceded itscertification.

8For purposes of this paragraph, the term “CPEO” is intended to include the CPEO before it applied for certification and while its application for certification was pending.

May 23, 2016 Bulletin No. 2016–21870

failure to meet any of the requirements forCPEOs, and the IRS will suspend or re-voke certification if the IRS determines, inits sole discretion, that such failure pres-ents a material risk to the IRS’s collectionof federal employment taxes. If a CPEO’scertification is suspended, section 3511will not apply to any contract described insection 7705(e)(2) into which the CPEOenters during the suspension period. If aCPEO’s certification is revoked, the orga-nization will not be considered a CPEOfor purposes of section 3511 after the ef-fective date of such revocation unless anduntil it again applies and is again certifiedas a CPEO. However, an organizationwhose certification as a CPEO has beenrevoked may not re-apply to be certifiedas a CPEO until one year has passed sincethe effective date of its revocation. Nei-ther the suspension nor the revocation ofan organization’s status as a CPEO willaffect its potential liability under§ 31.3504–2.

The temporary regulations provide thatan organization whose certification as aCPEO has been suspended or revokedmust notify its customers of the suspen-sion or revocation (in the time and mannerprovided in further guidance). In addition,the IRS will make public a CPEO’s sus-pension or revocation and may also indi-vidually notify the CPEO’s customers ofsuch suspension or revocation.

Effective/Applicability Date

The IRS has announced that it plans tobegin accepting applications for CPEOcertification on July 1, 2016. Accordingly,the temporary regulations apply on andafter July 1, 2016. Pursuant to section7805(e)(2), the temporary regulations ex-pire on or before May 3, 2019.

Statement of Availability of IRSDocuments

IRS revenue procedures, revenue rul-ings, notices, and other guidance cited inthis document are published in the Inter-nal Revenue Bulletin (or Cumulative Bul-letin) and are available from the Superin-tendent of Documents, U.S. GovernmentPrinting Office, Washington, DC 20402,or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. For the applicability of theRegulatory Flexibility Act (5 U.S.C.chapter 6) please refer to the SpecialAnalyses section of the preamble to thecross-referenced notice of proposed rule-making published in the Proposed Rulessection in this issue of the Internal Rev-enue Bulletin. Pursuant to section 7805(f)of the Code, these regulations have beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on their impact on smallbusiness.


The principal authors of these regula-tions are Melissa Duce, Andrew Holu-beck, and Neil Shepherd of the Office ofAssociate Chief Counsel (Tax Exemptand Government Entities). However,other personnel from the IRS and theTreasury Department participated in thedevelopment of these regulations.

List of Subjects

26 CFR Part 301

Employment taxes, Estate taxes, Ex-cise taxes, Gift taxes, Income taxes, Pen-alties, Reporting and recordkeeping re-quirements.

26 CFR Part 602

Reporting and recordkeeping require-ments.

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 301 and602 are amended as follows:


Paragraph 1. The authority citation forpart 301 is amended by adding entries innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 301.7705–1T also issued under26 U.S.C. 7705(h).

Section 301.7705–2T also issued under26 U.S.C. 7705(h).

* * * * *Par. 2. Sections 301.7705–1T and

301.7705–2T are added to read as follows:

§ 301.7705–1T Certified professionalemployer organization.

(a) Application. The definitions setforth in this section apply for purposes ofthis section, § 301.7705–2T and sections3302(h), 3303(a)(4), 3511, 6053(c)(8),and 7528(b)(4).

(b) Definitions—(1) Certified profes-sional employer organization (CPEO)means a person that applies to be certifiedas a CPEO in accordance with§ 301.7705–2T(a) and has been certifiedby the Internal Revenue Service (IRS) asmeeting the requirements of § 301.7705–2T. For purposes of § 301.7705–2T(g)(2),the term CPEO also includes the personbefore it applied for certification andwhile its application is pending with theIRS. For all other purposes, a person is aCPEO as of the effective date of its certi-fication (as specified in the certificationnotice described in § 301.7705–2T(a)(2))and until its certification is revoked by theIRS (as described in § 301.7705–2T(n))or, if earlier and applicable, until theCPEO voluntarily terminates its certifica-tion in the time and manner prescribed bythe Commissioner in further guidance.

(2) CPEO applicant means a personthat has applied to be certified as a CPEOin accordance with § 301.7705–2T(a) andwhose application is pending with theIRS.

(3) CPEO contract. [Reserved](4) Certified public accountant (CPA)

means a certified public accountantwho—

(i) With respect to a CPEO applicant orCPEO, is independent of the CPEO appli-cant or CPEO (as prescribed by the Amer-ican Institute of Certified Public Accoun-tants’ Professional Standards, Code ofProfessional Conduct, and its interpreta-tions and rulings);

(ii) Is not currently under suspension ordisbarment from practice before the IRS;

(iii) Is duly qualified to practice in anystate;

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(iv) Files with the IRS a written decla-ration that he or she is currently qualifiedas a CPA and authorized to represent theCPEO applicant or CPEO before the IRS;and

(v) Meets such other requirements asthe Commissioner may prescribe in fur-ther guidance.

(5) Covered employee. [Reserved](6) Customer. [Reserved](7) Federal employment taxes means

the taxes imposed by subtitle C of theInternal Revenue Code.

(8) Guidance includes guidance pub-lished in the Federal Register or InternalRevenue Bulletin, as well as administra-tive guidance such as forms, instructions,publications, or other guidance on theIRS.gov Web site.

(9) Partnership means a business en-tity (as described in § 301.7701–2(a)) thatis classified as a partnership for federal taxpurposes under §§ 301.7701–1, 301.7701–2,and 301.7701–3. Accordingly, any refer-ences to a managing member or generalpartner of a partnership mean a managingmember or general partner of an entitythat is classified as a partnership for fed-eral tax purposes.

(10) Precursor entity—(i) In general.A precursor entity means, with respect toa CPEO applicant, any related entity ofthe CPEO applicant that is or was aprovider of employment-related servicesthat—

(A) Has made a substantial asset trans-fer to the CPEO applicant during the cal-endar year that the CPEO applicant ap-plies for certification or any of the threepreceding calendar years or plans to makesuch a substantial asset transfer while theapplication for certification is pending orin the 12-month period following the dateof the CPEO applicant’s application forcertification; or

(B) Has ceased operations or dissolvedduring the calendar year that the CPEOapplicant applied for certification or anyof the three preceding calendar years.

(ii) Related. For purposes of this para-graph (b)(10), a provider of employment-related services is considered a relatedentity of a CPEO applicant if it is a relatedentity within the meaning of paragraph(b)(12) of this section or if it would be orwould have been such a related entitybased on the ownership and responsible in-

dividuals of the provider of employment-related services at the time of its substantialasset transfer, ceasing of operations, or dis-solution, as applicable, and the ownershipand responsible individuals of the CPEOapplicant at the time of its application.

(11) Provider of employment-relatedservices means a person that provides em-ployment tax administration, payroll ser-vices, or other employment-related com-pliance services to clients, including, butnot limited to, collecting, reporting, andpaying employment taxes with respect towages or compensation paid by the personto individuals performing services for theclients. A provider of employment-relatedservices includes, but is not limited to, aCPEO.

(12) Related entity means, with respectto a CPEO applicant or CPEO, any personthat meets one or more of the followingcriteria:

(i) The person is a member of a con-trolled group of which the CPEO appli-cant or CPEO is also a member. For pur-poses of this paragraph (b)(12)(i),controlled group has the meaning given tosuch term by sections 414(b) and (c) andthe regulations thereunder, except that—

(A) With respect to a person that is nota provider of employment-related services“more than 50 percent” will be substitutedfor “at least 80 percent” each place itappears in section 1563(a) (which iscross-referenced in section 414(b)) and§ 1.414(c)–2 of this chapter); and

(B) With respect to a person that is aprovider of employment-related services,“more than 5 percent” will be substitutedfor “at least 80 percent” each place it ap-pears in section 1563(a) and § 1.414(c)–2 ofthis chapter; or

(ii) The person is a provider ofemployment-related services and—

(A) A majority of the directors or amajority of the officers (as described inparagraph (b)(13)(ii) of this section) of theCPEO applicant or CPEO are directors orofficers (as described in paragraph(b)(13)(ii) of this section), respectively, ofthe provider of employment-related ser-vices; or

(B) An individual is a responsible in-dividual of both the provider ofemployment-related services and theCPEO applicant or CPEO by reason ofparagraph (b)(13)(i) of this section.

(13) Responsible individual means,with respect to a CPEO applicant orCPEO, (or, for purposes of paragraphs(b)(10)(ii) or (b)(12)(ii) of this section, aprovider of employment-related services),the following individuals:

(i) Any individual who owns, directlyor indirectly and applying the constructiveownership rules of section 1563(e) withrespect to stock ownership and by substi-tuting the term “interest” for the term“stock” and the term “partnership” for theterm “corporation” used in that section, asappropriate for purposes of determiningwhether an interest in a partnership is in-directly owned by any person, 33 percentor more of—

(A) In the case of a corporation, thetotal combined voting power of all classesof stock entitled to vote of such corpora-tion or of the total value of shares of allclasses of stock of such corporation; or

(B) In the case of a partnership, thecapital interest or profits interest of suchpartnership.

(ii) Any individual who is a director oran officer. For purposes of this paragraph(b)(13)(ii), a director is a voting memberof the governing body (that is, the boardof directors or equivalent controlling bodyauthorized under state law to make gov-ernance decisions on behalf of the organi-zation), and the officers are determined byreference to the organizing document, by-laws, or resolutions of the governingbody, or otherwise designated consistentwith state law. Officers may include apresident, vice-president, secretary, andtreasurer.

(iii) Any individual who, regardless oftitle, has ultimate responsibility for imple-menting the decisions of the organiza-tion’s governing body. An individual whoserves with the title of chief executiveofficer, executive director, and/or presi-dent has this ultimate responsibility. Anindividual with this ultimate responsibilitymay include an individual who is nottreated as an employee of the organiza-tion. If this ultimate responsibility resideswith two or more individuals (for exam-ple, co-presidents), who may exercisesuch responsibility in concert or individ-ually, then each individual is a responsibleindividual.

(iv) Any individual who, regardless oftitle, has ultimate responsibility for super-

May 23, 2016 Bulletin No. 2016–21872

vising the management, administration, oroperation of the organization. An individ-ual who serves with the title of chief op-erating officer has this ultimate responsi-bility. An individual with this ultimateresponsibility may include an individualwho is not treated as an employee of theorganization. If this ultimate responsibil-ity resides with two or more individuals,who may exercise such responsibility inconcert or individually, then each individ-ual is a responsible individual.

(v) Any individual who, regardless oftitle, has ultimate responsibility for man-aging the organization’s finances. An in-dividual who serves with the title of chieffinancial officer or treasurer has this ulti-mate responsibility. An individual withthis ultimate responsibility may include anindividual who is not treated as an em-ployee of the organization. If this ultimateresponsibility resides with two or moreindividuals who may exercise the responsi-bility in concert or individually, then eachindividual is a responsible individual.

(vi) In the case of a partnership, anyindividual who is a managing member orgeneral partner.

(vii) In the case of a sole proprietor-ship, the sole proprietor.

(viii) Any other individual with pri-mary responsibility for the organization’sfederal employment tax compliance.

(14) Self-employed individual. [Re-served]

(15) Substantial asset transfer meansany transfer of 35 percent or more of thevalue of the operating assets of the personmaking the transfer, whether through oneor a series of transactions and whetheraccomplished through sale, lease, gift, as-signment, succession, merger, consolida-tion, corporate separation, or any othermeans. For purposes of this paragraph(b)(15), operating assets include both tan-gible and intangible resources related tothe conduct of the person’s trade or busi-ness, including but not limited to suchintangible assets as contracts, agreements,receivables, employees, and goodwill(which includes the value of a trade orbusiness based on expected continuedcustomer patronage due to its name, rep-utation, or any other factors). In the caseof a contract described in section7705(e)(2) or a service agreement de-scribed in § 31.3504–2(b)(2) of this chap-

ter entered into by a provider ofemployment-related services, even if thecontract or agreement is not sold, gifted,assigned, or otherwise formally trans-ferred to a CPEO applicant, it will beconsidered transferred from the providerof employment-related services to theCPEO applicant if the CPEO applicantreports, withholds, or pays, under its em-ployer identification number (EIN), anyapplicable federal employment taxes withrespect to the wages of any individualscovered by the contract or agreement.

(c) Effective/applicability date—(1) Ingeneral. Except as provided in paragraph(c)(2) of this section, this section applieson and after July 1, 2016.

(2) Definitions related to section 3511.[Reserved]

(3) Expiration date. The applicabilityof this section expires on or before May 3,2019.

§ 301.7705–2T CPEO certificationrequirements.

(a) Application requirement and certi-fication—(1) Application. To be certifiedas a certified professional employer orga-nization (CPEO), a person must submit aproperly completed and executed applica-tion for certification as a CPEO in the timeand manner prescribed by, and providingsuch information as required by, this sec-tion and any further guidance issued bythe Commissioner. In addition, the appli-cant’s responsible individuals must sub-mit such information as is specified in thissection and further guidance.

(2) Notice. A CPEO applicant will benotified by the Internal Revenue Service(IRS) whether its application for certifica-tion has been approved or denied, and, ifapproved, the effective date of certifica-tion. If the IRS denies the application, theIRS will inform the CPEO applicant of thereason(s) for denial.

(3) Public disclosure of certification. Ifthe IRS approves a CPEO applicant’s ap-plication for certification, the IRS willmake available to the public the name andaddress of the CPEO, as well as the effec-tive date of its certification, in the timeand manner described in further guidance.

(4) Effective date of certification. ACPEO’s certification will be effective asof the effective date of certification spec-

ified in the notice described in paragraph(a)(2) of this section and in the publicdisclosure described in paragraph (a)(3) ofthis section and will continue in effectuntil the effective date of the revocation ofthe CPEO’s certification, if any, as de-scribed in paragraph (n) of this section or,if earlier, the date that the CPEO volun-tarily terminates its certification in thetime and manner prescribed by the Com-missioner in further guidance.

(b) Requirements for certification. Toreceive and maintain certification, aCPEO applicant or CPEO must meet therequirements described in this section, aswell as any additional requirements theCommissioner may prescribe in furtherguidance. In addition, any precursor enti-ties, related entities, and responsible indi-viduals (as defined in §§ 301.7705–1T(b)(10), (12), and (13), respectively) ofthe CPEO applicant or CPEO must meetany requirements applicable to them de-scribed in this section and in further guid-ance. The IRS may deny an applicationfor certification or revoke or suspend aCPEO’s certification if a CPEO applicantor CPEO, or one or more of its precursorentities, related entities, or responsible in-dividuals, fails to meet any applicable re-quirement described in this section orother applicable guidance, and the IRSwill do so if the IRS determines, in its solediscretion, that such failure presents a ma-terial risk to the IRS’s collection of fed-eral employment taxes. In determiningwhether one or more failures to meet therequirements described in this sectionpresents a material risk to the IRS’s col-lection of federal employment taxes, theIRS generally will consider all relevantfacts and circumstances, including thesize, scope, nature, significance, recur-rence, and timing of and reason for thefailure and, in the case of a CPEO, anyprior failures of the CPEO to meet therequirements of this section.

(c) Suitability—(1) In general. TheIRS may deny an application for certifi-cation or revoke or suspend a CPEO’scertification for any of the following rea-sons:

(i) The CPEO applicant or CPEO, orany of its precursor entities, related enti-ties, or responsible individuals, has failedto pay any applicable federal, state, orlocal taxes or file any required federal,

Bulletin No. 2016–21 May 23, 2016873

state, or local tax or information returns ina timely and accurate manner, unless thefailure is determined to be due to reason-able cause and not due to willful neglect.

(ii) The CPEO applicant or CPEO, orany of its precursor entities, related enti-ties, or responsible individuals, has beencharged or convicted of any criminal of-fense under the laws of the United Statesor of a state or political subdivisionthereof, or is the subject of an active IRScriminal investigation.

(iii) The CPEO applicant or CPEO, orany of its precursor entities, related enti-ties, or responsible individuals, has beensanctioned, or had a license, registration,or accreditation (including a license, reg-istration, or accreditation relating to itsstatus or ability to operate as a profes-sional employer organization) denied,suspended, or revoked, by a court of com-petent jurisdiction, licensing board, assur-ance or other professional organization, orfederal or state agency, court, body,board, or other authority for any miscon-duct that involves dishonesty, fraud, orbreach of trust or that otherwise bearsupon the suitability of the CPEO applicantor CPEO to perform its professional func-tions (including, but not limited to, anycivil or criminal penalty described in 42U.S.C. 503(k)(1)(D) imposed by statelaw).

(iv) The CPEO applicant or CPEO, orany of its precursor entities, related enti-ties, or responsible individuals, is listed onany sanctions list compiled by the Officeof Foreign Assets Control (OFAC) withinthe Department of Treasury, including,but not limited to the OFAC ConsolidatedSanctions List and the OFAC SpeciallyDesignated Nationals (SDN) List.

(v) The CPEO applicant or CPEO, orany of its precursor entities, related enti-ties, or responsible individuals, fails todemonstrate a history of financial respon-sibility, which the IRS may assess bychecks on credit history and other similarindicators.

(vi) The CPEO applicant or CPEO andthe responsible individuals of the CPEOapplicant or CPEO fail to demonstrate ad-equate collective knowledge or experi-ence with respect to:

(A) Federal or state employment taxreporting, depositing, and withholding re-quirements;

(B) Handling and accounting of pay-roll, tax payments, and other funds onbehalf of others;

(C) Effective recordkeeping systems;(D) Retention of qualified personnel

and legal advisors as needed; and(E) General business and risk manage-

ment.(vii) The CPEO applicant or CPEO, or

any of its responsible individuals, givesfalse or misleading information (includingby intentionally omitting relevant infor-mation), or participates in any way in thegiving of false or misleading information,to the IRS, knowing, or having reason toknow, that the information is false or mis-leading. For the purpose of this subsec-tion, “information” includes (but is notlimited to) facts or other matters containedin testimony, federal tax returns, and fi-nancial statements and opinions regardingsuch statements; applications for certifica-tion (and all accompanying documenta-tion); affidavits, declarations, assertions,attestations, statements, and agreements;and periodic verifications that the require-ments of this section continue to be met;and any other information that is requiredto be provided by this section, section3511(g) and regulations thereunder, orfurther guidance.

(2) Must be a business entity that is nota disregarded entity. A CPEO must be abusiness entity described in § 301.7701–2(a), except that a CPEO may not be abusiness entity that is disregarded as anentity separate from its owner for federaltax purposes under §§ 301.7701–2 and301.7701–3 (without regard to the specialrule in § 301.7701–2(c)(2)(iv) that pro-vides that such entities are corporationsfor federal employment tax purposes). Ac-cordingly, a CPEO may not be an individ-ual or an entity classified as a trust under§ 301.7701–4.

(3) Authorization to investigate suit-ability. A CPEO applicant or CPEO, andeach of its responsible individuals, musttake such actions as are necessary to au-thorize the IRS to investigate the accuracyof statements and submissions, includingwaiving confidentiality and privilegewhen necessary, and to conduct compre-hensive background checks, including,but not limited to, checks on tax compli-ance, criminal background, professionalexperience (including through the contact

of third-party references), credit history,and professional sanctions. In addition, aCPEO applicant or CPEO, and any of itsresponsible individuals, must provide theIRS with such additional information asthe IRS may request to facilitate suchbackground investigations. Each responsi-ble individual of a CPEO applicant orCPEO must also submit fingerprints in thetime and manner and under the circum-stances prescribed by the Commissionerin further guidance.

(d) Business location—(1) State of or-ganization. A CPEO applicant or CPEOmust be created or organized in the UnitedStates or under the law of the UnitedStates or of any state.

(2) Business location in the UnitedStates. A CPEO applicant or CPEO musthave one or more established, physicalbusiness locations in the United States atwhich regular operations that constitute atrade or business within the United States(within the meaning of section 864(b))take place and at which a significant por-tion of its CPEO-related functions are car-ried on and administrative records arekept.

(3) United States responsible individu-als. A majority of the CPEO applicant’s orCPEO’s responsible individuals must becitizens or residents of the United States.

(4) Use of financial institution. ACPEO applicant or CPEO must use onlyfinancial institutions described in section265(b)(5) to hold its cash and cash equiv-alents, receive payments from customers,and pay wages and federal employmenttaxes.

(e) Financial statements—(1) CPEOs.By the last day of the sixth month after theend of each fiscal year, and beginningwith the first fiscal year that ends after theCPEO’s effective date of certification, aCPEO must cause to be prepared and pro-vided to the IRS a copy of its annualaudited financial statements for the fiscalyear and an opinion of a certified publicaccountant (CPA) that such financialstatements—

(i) Are presented fairly in accordancewith GAAP; and

(ii) Reflect positive working capital or,only if the CPEO satisfies the require-ments of paragraph (e)(3) of this section,reflect negative working capital, with suchopinion in either case setting forth in de-

May 23, 2016 Bulletin No. 2016–21874

tail a calculation of the CPEO’s workingcapital as reflected in the financial state-ments.

(2) CPEO applicants—(i) In general.A CPEO applicant must cause to be pre-pared and provided to the IRS, with itsapplication, a copy of its annual auditedfinancial statements and an opinion withrespect to such financial statements (asdescribed in paragraph (e)(1) of this sec-tion) for the most recently completed fis-cal year as of the date it applies for certi-fication. Notwithstanding the precedingsentence, if a CPEO applicant applies forcertification before the last day of thesixth month following its most recentlycompleted fiscal year, and the audit of thefinancial statements for this fiscal year hasnot yet been completed at the time ofapplication, a CPEO applicant must pro-vide to the IRS, with its application, thefinancial statements and opinion describedin paragraph (e)(1) of this section for theimmediately preceding fiscal year, if any,and must subsequently provide to the IRSthe financial statements and opinion de-scribed in paragraph (e)(1) of this sectionfor the most recently completed fiscal yearby the last day of the sixth month aftersuch fiscal year ends. In addition, for anyfiscal year that ends after the CPEO ap-plicant applies for certification and on orbefore the effective date of certification, ifapplicable, the CPEO applicant must pro-vide the audited financial statements andopinion described in paragraph (e)(1) ofthis section by the last day of the sixthmonth after such fiscal year ends. Theobligation to provide the audited financialstatements described in the preceding sen-tence continues to apply even if the CPEOapplicant is certified as a CPEO prior tothe date the audited financial statementsare provided.

(ii) Newly established CPEO appli-cants. In addition to the requirements inparagraph (e)(2)(i) of this section, a CPEOapplicant that was not operating as a pro-vider of employment-related services forall or part of the most recently completedfiscal year as of the date it applies forcertification must provide a copy of theaudited financial statements of any precur-sor entity, if one exists, and an opinionwith respect to such financial statements(as described in paragraph (e)(1) of thissection) for the precursor entity’s most

recently completed fiscal year as of thedate of the application for certification insuch time and manner as the Commis-sioner may prescribe in further guidance,as well as such additional information asthe Commissioner may prescribe in fur-ther guidance.

(3) Exception to positive working cap-ital requirement. A CPEO applicant orCPEO with annual audited financial state-ments for a fiscal year that do not reflectpositive working capital will not fail tomeet the requirements of paragraph(e)(1)(ii) of this section if—

(i) The CPEO applicant or CPEO hasnegative working capital for no more thantwo consecutive fiscal quarters of that fis-cal year, as demonstrated by the financialstatements (for the final fiscal quarter inthe fiscal year) and the statements de-scribed in paragraph (f)(1)(ii) of this sec-tion (for any other fiscal quarter);

(ii) The CPEO applicant or CPEO, orits CPA, provides, in such time and man-ner as the Commissioner may prescribe infurther guidance, an explanation to theIRS describing the reason for the failure;and

(iii) The IRS determines, in its solediscretion, that the failure does not presenta material risk to the IRS’s collection offederal employment taxes.

(4) Completed fiscal year. For purposesof this paragraph (e), a fiscal year will beconsidered completed once the last day ofthat fiscal year has ended, regardless ofwhether the CPEO applicant or CPEOwas in operation or certified for all 12months of the fiscal year or the fiscal yearconsisted of fewer than 12 months.

(f) Quarterly assertions and attesta-tions—(1) CPEOs. By the last day of thesecond month after the end of each calen-dar quarter, and beginning with the firstcalendar quarter, that ends after theCPEO’s effective date of certification, aCPEO must provide the following to theIRS:

(i) An assertion, signed by a responsi-ble individual under penalties of perjury,stating that the CPEO has withheld andmade deposits of all federal employmenttaxes (other than taxes imposed by chapter23 of the Code) as required by subtitle Cfor such calendar quarter and an examina-tion level attestation from a CPA stating

that such assertion is fairly stated in allmaterial respects.

(ii) A statement signed by a responsi-ble individual under penalties of perjuryverifying that the CPEO has positiveworking capital (as determined in accor-dance with GAAP) at the end of the mostrecently completed fiscal quarter, as wellas such additional financial informationthat the Commissioner may specify in fur-ther guidance.

(2) Exceptions—(i) Immaterial fail-ures. A CPEO will not fail to meet therequirements of paragraph (f)(1)(i) of thissection if the CPA examination level at-testation indicates that the CPEO hasfailed to withhold or make deposits incertain immaterial respects, providedthat—

(A) The attestation provides a sum-mary of the immaterial failures that werefound;

(B) The attestation states that the fail-ures were immaterial and isolated and donot reflect a meaningful lapse in compli-ance with federal employment tax with-holding and deposit requirements; and

(C) The IRS determines, in its solediscretion, that the isolated and immaterialfailures identified by the CPA do not pres-ent a material risk to the IRS’s collectionof federal employment taxes.

(ii) Negative working capital. A CPEOwith negative working capital at the endof a fiscal quarter will not fail to meet therequirements of paragraph (f)(1)(ii) of thissection if—

(A) The CPEO does not have negativeworking capital at the end of the two fiscalquarters immediately preceding such fis-cal quarter, as demonstrated by the finan-cial statements described in paragraph(e)(1) of this section, if available, or thestatements described in paragraph (f)(1)(ii)of this section;

(B) The CPEO provides an explanationto the IRS describing the reason for suchnegative working capital in such time andmanner as the Commissioner may pre-scribe in further guidance; and

(C) The IRS determines, in its solediscretion, that the negative working cap-ital does not present a material risk to theIRS’s collection of federal employmenttaxes.

(3) CPEO applicants—(i) In general.By the last day of the second month after

Bulletin No. 2016–21 May 23, 2016875

the end of each calendar quarter, begin-ning with the most recently completedcalendar quarter as of the date of a CPEOapplicant’s application for certificationand ending with the most recently com-pleted calendar quarter as of the effectivedate of certification (if applicable), aCPEO applicant must provide to the IRSthe assertion, examination level attesta-tion, and working capital statement de-scribed in paragraph (f)(1) of this section,subject to the exceptions described in para-graph (f)(2) of this section (though substi-tuting “CPEO applicant” for “CPEO”).

(ii) Newly established CPEO appli-cants. A CPEO applicant that was notoperating as a provider of employment-related services during the most recentlycompleted calendar quarter as of the dateof its application for certification or dur-ing any calendar quarter that ends whileits application for certification is pendingmust provide to the IRS the assertion,examination level attestation, and work-ing capital statement described in para-graph (f)(1) of this section with respect toany precursor entity, if applicable, in suchtime and manner as the Commissionermay prescribe in further guidance, as wellas such additional information as theCommissioner may prescribe in furtherguidance.

(g) Bond—(1) In general. A CPEOmust post a bond for the payment of fed-eral employment taxes issued in the formand containing the terms prescribed by theCommissioner in further guidance and inan amount described in paragraph (g)(2)of this section.

(2) Bond amount—(i) In general. Theamount of the bond described in para-graph (g)(1) of this section must be, foreach period beginning on April 1 of anycalendar year and ending on March 31 ofthe following calendar year (or, in the caseof a newly certified CPEO, beginning withthe effective date of certification and end-ing on the subsequent March 31) (thebond period), at least equal to the greaterof—

(A) Five percent of the CPEO’s liabil-ity under section 3511 (or, if applicable,the liability described in paragraph(g)(2)(ii) of this section) during the calen-dar year preceding the beginning of thebond period, but not more than$1,000,000; or

(B) $50,000.(ii) Amount of bond in first and second

year as a CPEO. If a CPEO does not haveany liability under section 3511 for all ora portion of a preceding calendar yearbecause the CPEO was not certified as aCPEO for all or a portion of that preced-ing calendar year, the liability applied forpurposes of paragraph (g)(2)(i)(A) of thissection for the entirety or portion of thepreceding calendar year during which theCPEO was not certified will be the federalemployment tax liability of the CPEO,and of any precursor entity of the CPEOdescribed in § 301.7705–1T(b)(10)(i)(A),that results from one or more serviceagreements described in § 31.3504–2(b)(2) of this chapter. With respect to thefederal employment tax liability of suchprecursor entity during a preceding calen-dar year, the liability will only be appliedfor purposes of paragraph (g)(2)(i)(A) ofthis section to the extent it results fromservice agreements that have been trans-ferred or are intended to be transferred bythe precursor entity to the CPEO at thetime the bond amount is determined. Forpurposes of this paragraph (g)(2)(ii), anentity is considered a precursor entity of aCPEO described in § 301.7705–1T(b)(10)(i)(A) if it was determined to beits precursor entity under that section atthe time it was a CPEO applicant.

(3) Cancellation—(i) Notice. A bondrequired under this paragraph (g) mustprovide that it may be cancelled by thesurety only after the surety gives writtennotice of such cancellation to the IRS andthe CPEO in such time and manner as theCommissioner may prescribe in furtherguidance.

(ii) Ongoing liability. A bond requiredunder this paragraph (g) must providethat, if a surety cancels the bond withoutissuing a superseding bond to the CPEO,the surety will, notwithstanding the can-cellation, remain liable for all federal em-ployment tax liability accrued by theCPEO during the period beginning withthe effective date of the first bond issuedby the surety to the CPEO in any consec-utive series of bonds issued by that suretyprior to cancellation and ending with thecancellation of the bond (the total bondperiod), up to the penal amount of thebond at the time of the cancellation. Acancelling surety will remain liable as de-

scribed in this paragraph (g)(3)(ii) for fed-eral employment tax liability accrued dur-ing the total bond period up to the penalamount of the bond for as long as theCommissioner may assess and collecttaxes for such period under sections 6501and 6502.

(4) Strengthening bonds to reflectCPEO adjustment or IRS assessment. Incalculating five percent of its liability un-der section 3511 (or other applicable fed-eral employment tax liability) for a pre-ceding calendar year for purposes ofdetermining a bond amount, a CPEO mustbase its calculation on the amount of ap-plicable federal employment taxes that itreported and paid for that preceding cal-endar year. However, if the CPEO or theIRS subsequently determines during theperiod for which the bond amount appliesthat the applicable federal employmenttax liability for the preceding calendaryear was higher than the amount reportedand paid (and makes an adjustment orassessment, respectively, reflecting suchdetermination) and if the bond that theCPEO had posted was less than$1,000,000, the CPEO must post astrengthening bond that, together with theinitially-posted bond, equals a totalamount that reflects the adjusted applica-ble federal employment tax liability up to$1,000,000. Alternatively, such a CPEOcould post a superseding bond in suchadjusted amount.

(5) No posting of collateral. A CPEOmust meet the bond requirements of thisparagraph (g) without posting collateral.

(6) Requirements for surety. Anysurety that issues a bond required by thisparagraph (g) to a CPEO must be a suretycompany that holds a certificate of author-ity from the Secretary as an acceptablesurety on federal bonds and meets suchother requirements as the Commissionermay prescribe in further guidance.

(h) Controlled group. All CPEO appli-cants and CPEOs that are members of acontrolled group within the meaning ofsections 414(b) and (c) will be treated as asingle CPEO applicant or CPEO for pur-poses of paragraphs (e) (other than(e)(1)(ii)), (f) (other than (f)(1)(ii)), and(g) of this section.

(i) Consents to disclose. To receive andmaintain certification, a CPEO applicantor CPEO must provide such consents for

May 23, 2016 Bulletin No. 2016–21876

the IRS to disclose confidential tax infor-mation to its customers, and to other per-sons as necessary to carry out the pur-poses of these regulations, that relates toits certification and obligations to report,deposit, and pay federal employmenttaxes as the Commissioner may require infurther guidance.

(j) Periodic verification. A CPEO mustperiodically verify that it continues tomeet the requirements of this section inthe time and manner prescribed by theCommissioner in further guidance.

(k) Notification of material changes. ACPEO applicant or CPEO must notify theIRS, in the time and manner prescribed bythe Commissioner in further guidance, ofany change that materially affects the con-tinuing accuracy of any agreement or in-formation that was previously made orprovided to the IRS.

(l) Accrual method of accounting. ACPEO must compute its taxable incomeusing an accrual method of accounting or,if applicable, another method that theCommissioner provides for in furtherguidance.

(m) Compliance with reporting obliga-tions—(1) In general. A CPEO mustagree to make reports to the IRS and to itsclients as provided in section 3511(g) andthe regulations thereunder, including fil-ing all federal employment tax returns andinformation returns as required.

(2) Filing on magnetic media. A CPEOmust file all returns, schedules, reports,and other forms and documents on mag-netic media when required by section3511(g) and the regulations thereunder orother Treasury regulations.

(n) Suspension and revocation—(1) Ingeneral. The IRS may suspend or revokethe certification of any CPEO, in the timeand manner and under the circumstancesprescribed by the Commissioner in furtherguidance, as a result of one or more fail-ures to meet any of the requirements for

CPEOs described in this section, section3511(g) and the regulations thereunder,and any further guidance and will suspendor revoke certification if the IRS deter-mines, in its sole discretion, that such fail-ure(s) present a material risk to the IRS’scollection of federal employment taxes.See paragraph (b) of this section for thefactors the IRS will consider in determin-ing whether one or more failures to meetany of the requirements described in thissection presents a material risk to theIRS’s collection of federal employmenttaxes.

(2) Suspension. Section 3511 will notapply to any contract described in section7705(e)(2) into which the CPEO enterswhile its certification is suspended.

(3) Revocation. If an organization’scertification as a CPEO is revoked, theorganization will not be considered aCPEO for purposes of section 3511 unlessand until it again applies to be certified asa CPEO in accordance with paragraph (a)of this section and is again certified by theIRS as meeting the requirements of thissection. An organization whose certifica-tion as a CPEO has been revoked may notre-apply to be certified as a CPEO untilone year has passed since the effectivedate of its revocation.

(4) Disclosure of suspension and revo-cation—(i) Notification by the CPEO. Anorganization whose certification as aCPEO has been suspended or revokedmust notify its customers of such suspen-sion or revocation in the time and mannerprescribed by the Commissioner in furtherguidance.

(ii) Disclosure by the IRS. If the IRSsuspends or revokes an organization’s cer-tification as a CPEO, the IRS will makeavailable to the public the fact of suchsuspension or revocation in the time andmanner described in further guidance. TheIRS may also individually notify the or-

ganization’s customers of such suspensionor revocation.

(o) Effective/applicability date—(1) Ingeneral. This section applies on and afterJuly 1, 2016.

(2) Expiration date. The applicabilityof this section expires on or before May 3,2019.

PART 602—OMB CONTROL NUM-BERS UNDER THE PAPERWORK RE-DUCTION ACT

Par. 3. The authority citation for part602 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 4. In § 602.101, paragraph (b) is

amended by adding the following entriesin numerical order to the table to read asfollows:

§ 602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part orsection whereidentified anddescribed

Current OMBcontrol no.

* * * * * * *

301.7705–1T....................1545–2266

301.7705–2T....................1545–2266

* * * * * * *

Kirsten B. Wielobob,Acting Deputy Commissioner for



Mark J. Mazur,Assistant Secretary of the



Bulletin No. 2016–21 May 23, 2016877

Part III. Administrative, Procedural, and MiscellaneousDiversificationRequirements for VariableAnnuity, Endowment, andLife Insurance Contractsunder Section 817(h)

Notice 2016–32

This notice provides guidance to tax-payers regarding the diversification re-quirements under section 817(h) of theInternal Revenue Code (Code) for a seg-regated asset account that invests in amoney market fund (MMF) that is a gov-ernment MMF. An MMF is a type ofinvestment company registered under theInvestment Company Act of 1940 (1940Act) and regulated as an MMF underRule 2a–7 under the 1940 Act (17 CFR270.2a–7).

I. BACKGROUND

a. Money market funds

In 2014, the Securities and ExchangeCommission (SEC) amended Rule 2a–7and other rules governing MMFs. SeeMoney Market Fund Reform; Amend-ments to Form PF (79 FR 47736). Rule2a–7 as amended identifies circumstancesunder which an MMF is permitted or re-quired to impose a liquidity fee or is per-mitted to impose a redemption gate. Whenan MMF has a liquidity fee in effect, theliquidity fee reduces the proceeds re-ceived by all redeeming shareholders. Aredemption gate is a temporary suspen-sion of redemptions of shares in the MMF.Liquidity fees and redemption gates maybe imposed by all MMFs in certain cir-cumstances.

Rule 2a–7 defines a government MMFas an MMF “that invests 99.5 percent ormore of its total assets in cash, govern-ment securities, and/or repurchase agree-ments that are collateralized fully [by cashitems or government securities].” 17 CFR270.2a–7(a)(14). Section 2(a)(16) of the1940 Act defines government security tomean “any security issued or guaranteedas to principal or interest by the UnitedStates, or by a person controlled or super-vised by and acting as an instrumentalityof the Government of the United States

pursuant to authority granted by the Con-gress of the United States; or any certifi-cate of deposit for any of the foregoing.”15 USC 80a–2(a)(16). As with certainother 1940 Act definitions, this definitionof government security also applies forpurposes of section 851(b)(3) of the Code,which generally applies to MMFs. Seesection 851(c)(6).

Rule 2a–7 as amended requires anMMF other than a government MMF tobe prepared to impose a liquidity fee, and,in certain circumstances, to impose such afee unless the MMF’s board of directorsdetermines that such a fee is not in thebest interests of the fund. In contrast, Rule2a–7 permits, but does not require, gov-ernment MMFs to impose liquidity fees. Itis expected that some existing MMFs willconvert to government MMFs.

b. Variable contracts

Section 817(d) of the Code defines theterm “variable contract” to mean a con-tract that (1) “provides for the allocationof all or part of the amounts receivedunder the contract to an account which,pursuant to State law or regulation, is seg-regated from the general asset accounts ofthe company”; (2) provides for the pay-ment of annuities, is a life insurance con-tract, or provides for funding of insuranceon retired lives, as described in section807(c)(6); and (3) satisfies additional re-quirements in the rest of that subsection,including requirements to reflect the cur-rent investment return and market value ofthe segregated asset account.

Under section 817(h)(1) of the Code,“a variable contract (other than a pensionplan contract [as defined in section818(a)]) which is otherwise described in[section 817] and which is based on asegregated asset account shall not betreated as an annuity, endowment, or lifeinsurance contract for any period (and anysubsequent period) for which the invest-ments made by such account are not, inaccordance with regulations prescribed bythe Secretary, adequately diversified.” Seealso § 1.817–5(a)(1) of the Income TaxRegulations.

As defined in § 1.817–5(e), a “segre-gated asset account” consists of “all assets

the investment return and market value ofeach of which must be allocated in anidentical manner to any variable contractinvested in any of such assets.” See also§ 1.817–5(g) (providing examples illus-trating the application of the segregatedasset account definition).

Generally, the policyholder of a vari-able contract may select among variousinvestment strategies each of which re-sults in investment in different groups ofassets. Each of these groups may be asegregated asset account within the mean-ing of § 1.817–5(e). See, e.g., Rev. Rul.81–225, 1981–2 C.B. 12, modified byRev. Proc. 99–44, 1999–2 C.B. 598, clar-ified and amplified by Rev. Rul. 2007–7,2007–1 C.B. 468. Each segregated assetaccount must be adequately diversifiedwithin the meaning of section 817(h). Inaddition, the policyholder must not haveinvestor control either as a result of theability to select among investment strate-gies or for any other reason. See, e.g.,Rev. Rul. 77–85, 1977–1 C.B. 12; Rev.Rul. 2003–91, 2003–2 C.B. 347.

Section 1.817–5(b)(1)(i) provides that,except as otherwise provided by excep-tions in paragraphs (b) and (c) of§ 1.817–5, the investments of a segregatedasset account are considered adequatelydiversified only if:(A) No more than 55 percent of the value

of the total assets of the account isrepresented by any one investment;

(B) No more than 70 percent of the valueof the total assets of the account isrepresented by any two investments;

(C) No more than 80 percent of the value ofthe total assets of the account is repre-sented by any three investments; and

(D) No more than 90 percent of the valueof the total assets of the account isrepresented by any four investments.

Under § 1.817–5(c)(1), an account istreated as adequately diversified for a cal-endar quarter if it satisfies the require-ments of § 1.817–5(b) on the last day ofthe calendar quarter or within 30 daysafter that last day.

In applying the diversification require-ment of § 1.817–5(b), a look-through rulein § 1.817–5(f) treats a segregated assetaccount as the owner of assets held indi-rectly through certain investment vehicles

May 23, 2016 Bulletin No. 2016–21878

(certain regulated investment companies,certain real estate investment trusts, cer-tain partnerships, or certain trusts). If oneof these vehicles satisfies the criteria of§ 1.817–5(f)(2) and if a segregated assetaccount holds an interest in the vehicle,diversification of the account is tested as ifa pro rata portion of each asset of thevehicle were an asset of the account.

Section 1.817–5(h)(1) defines “govern-ment security” as “any security issued orguaranteed or insured by the United Statesor an instrumentality of the United States;or any certificate of deposit for any of theforegoing.” (This definition is similar tothe language used to define “governmentsecurity” in section 2(a)(16) of the 1940Act (quoted above).) For purposes of§ 1.817–5(h)(1), “an instrumentality ofthe United States” means “any person thatis treated for purposes of 15 U.S.C. 80a–2(16), as amended, as a person controlledor supervised by and acting as an instru-mentality of the Government of theUnited States pursuant to authoritygranted by the Congress of the UnitedStates.” Under section 817(h)(6), for pur-poses of determining whether a segre-gated asset account is adequately diversi-fied, each United States Governmentagency or instrumentality is treated as a

separate issuer. See also § 1.817–5(b)(1)(ii)(B).

Under current practice, only a limitednumber of United States agencies or in-strumentalities issue securities that Rule2a–7 allows MMFs to hold. Also, as wasdescribed above, some MMFs are ex-pected to convert to government MMFs,resulting in increased demand for govern-ment securities. This increased demandmay exacerbate MMFs’ difficulty in ac-quiring the assets necessary both to qual-ify as a government MMF and to satisfythe diversification requirements undersection 817(h) and § 1.817–5.

II. ALTERNATIVEDIVERSIFICATIONREQUIREMENTS FOR ASEGREGATED ASSET ACCOUNTTHAT INVESTS IN AGOVERNMENT MMF

The Treasury Department and the In-ternal Revenue Service have determinedthat variable contracts should be able tooffer government MMFs as an investmentoption. Therefore, the Treasury Depart-ment and the Internal Revenue Serviceintend to amend § 1.817–5. Pending thepromulgation and effective date of futureadministrative or regulatory guidance,

taxpayers may rely on the following alter-native diversification requirements under§ 1.817–5 for a segregated asset accountthat invests in a government MMF:

A segregated asset account within themeaning of § 1.817–5(e) is adequatelydiversified for purposes of section 817(h)if—(1) No policyholder has investor control;

and(2) Either—

(a) The account itself is a governmentMMF under Rule 2a–7(a)(14); or

(b) The account invests all of its as-sets in an “investment company,partnership, or trust” as defined in§ 1.817–5(f)(1) that satisfies thecriteria of § 1.817–5(f)(2) andqualifies as a government MMFunder Rule 2a–7(a)(14).

III. DRAFTING INFORMATION

The principal authors of this notice areSteve D. Hooe and Alexis A. MacIvor ofthe Office of the Associate Chief Counsel(Financial Institutions and Products). Forfurther information regarding this notice,contact Mr. Hooe at (202) 317-3900 (not atoll-free number) or Ms. MacIvor at (202)317-6995 (not a toll-free number).

Bulletin No. 2016–21 May 23, 2016879

26 CFR 601.204: Changes in accounting periods and in methods of accounting.(Also Part I, §§ 56, 61, 77, 118, 162, 163, 166, 167, 168, 171, 174, 179D, 194, 195, 197, 263, 263A, 267, 280F, 404, 446, 447, 448, 451, 454, 455, 461, 467, 471,472, 475, 481, 585, 816, 832, 833, 846, 860A–860G, 861, 904, 953, 985, 1272, 1273, 1278, 1281, 1363, 1400I, 1400L, 1400N; 1.61–1, 1.61–4, 1.61–8, 1.77–1,1.77–2, 1.118–2, 1.162–1, 1.162–3, 1.162–4, 1.162–11, 1.162–12, 1.166–1, 1.166–2, 1.166–4, 1.167(a)–2, 1.167(a)–3(b), 1.167(a)–4, 1.167(a)–7, 1.167(a)–8,1.167(a)–11, 1.167(a)–14, 1.167(e)–1, 1.168(d)–1, 1.168(i)–1, 1.168(i)–4, 1.168(i)–6, 1.168(i)–7, 1.168(i)–8, 1.168(k)–1, 1.171–4, 1.174–1, 1.174–3, 1.174–4,1.179–5, 1.194–1, 1.195–1, 1.197–2, 1.263(a)–1, 1.263(a)–2, 1.263(a)–3, 1.263(a)–4, 1.263(a)–5, 1.263A–1, 1.263A–2, 1.263A–3, 1.263A–4, 1.263A–7, 1.267(a)–1,1.280F–6, 1.404(b)–1T, 1.446–1, 1.446–1T, 1.446–2, 1.446–5, 1.446–6, 1.448–1T, 1.448–2, 1.451–1, 1.451–5, 1.454–1, 1.455–6, 1.461–1, 1.461–4, 1.461–5,1.467–1, 1.471–1, 1.471–2, 1.471–3, 1.471–4, 1.471–5, 1.471–8, 1.472–1, 1.472–2, 1.472–6, 1.472–8, 1.481–1, 1.481–4, 1.832–4, 1.832–5, 1.860A–6, 1.861–18,1.985–5, 1.985–8, 1.1016–3, 1.1245–3, 1.1272–1, 1.1273–1, 1.1273–2, 1.1363–2, 1.1374–4, 1.1400L(b)–1.)

Rev. Proc. 2016–29

LIST OF AUTOMATIC CHANGES.............................................................................................................................................884

SECTION 1. GROSS INCOME (§ 61) .........................................................................................................................................884

.01 Up-front Payments for Network Upgrades received by Utilities........................................................................................884

SECTION 2. COMMODITY CREDIT LOANS (§ 77) ................................................................................................................885

.01 Treating amounts received as loans .....................................................................................................................................885

SECTION 3. TRADE OR BUSINESS EXPENSES (§ 162) ........................................................................................................885

.01 Advances made by a lawyer on behalf of clients ...............................................................................................................885

.02 ISO 9000 Costs .....................................................................................................................................................................885

.03 Restaurant or tavern smallwares packages...........................................................................................................................885

.04 Timber grower fertilization costs .........................................................................................................................................885

.05 Materials and supplies ..........................................................................................................................................................885

.06 Repair and maintenance costs ..............................................................................................................................................885

.07 Wireline network asset maintenance allowance and units of property methods of accountingunder Rev. Proc. 2011–27 ....................................................................................................................................................885

.08 Wireless network asset maintenance allowance and units of property methods ofaccounting under Rev. Proc. 2011–28 .................................................................................................................................886

.09 Method of accounting under Rev. Proc. 2011–43 for taxpayers in the business of transporting,delivering, or selling electricity............................................................................................................................................886

.10 Method of accounting under Rev. Proc. 2013–24 for taxpayers in the business of generating steamor electric power. ..................................................................................................................................................................886

.11 Cable network asset capitalization methods of accounting under Rev. Proc. 2015–12.....................................................886

SECTION 4. BAD DEBTS (§ 166) ...............................................................................................................................................887

.01 Change from reserve method to specific charge-off method ..............................................................................................887

.02 Conformity election by bank after previous election automatically revoked.....................................................................887

SECTION 5. INTEREST EXPENSE (§ 163) AND AMORTIZABLE BOND PREMIUM (§ 171)..........................................887

.01 Revocation of § 171(c) election ...........................................................................................................................................887

.02 Change to comply with § 163(e)(3).....................................................................................................................................888

SECTION 6. DEPRECIATION OR AMORTIZATION (§ 56(a)(1), 56(g)(4)(A), 167, 168, 197,280F(a), 1400I, 1400L, or 1400N(d), OR FORMER § 168) .................................................................................888

.01 Impermissible to permissible method of accounting for depreciation or amortization......................................................888

.02 Permissible to permissible method of accounting for depreciation ....................................................................................892

.03 Sale, lease, or financing transactions ...................................................................................................................................894

.04 Change in general asset account treatment due to a change in the use of MACRS property ..........................................895

.05 Change in method of accounting for depreciation due to a change in the use of MACRS property...............................895

.06 Depreciation of qualified non-personal use vans and light trucks ......................................................................................896

.07 Impermissible to permissible method of accounting for depreciation or amortization for disposeddepreciable or amortizable property.....................................................................................................................................896

.08 Tenant construction allowances............................................................................................................................................897

May 23, 2016 Bulletin No. 2016–21880

.09 Safe harbor method of accounting for determining the depreciation of certain tangible assets usedby wireless telecommunications carriers under Rev. Proc. 2011–22 .................................................................................898

.10 Late partial disposition election (§ 168; § 1.168(i)–8)........................................................................................................898

.11 Revocation of a general asset account election (§ 168; § 1.168(i)–1, § 1.168(i)–1Tand Prop. Reg. § 1.168(i)–1)................................................................................................................................................901

.12 Partial dispositions of tangible depreciable assets to which the IRS’s adjustment pertains (§ 168; § 1.168(i)–8) ....................903

.13 Depreciation of leasehold improvements (§§ 167, 168, and 197; § 1.167(a)–4) ...........................................................................904

.14 Permissible to permissible method of accounting for depreciation of MACRS property(§ 168; §§ 1.168(i)–1, 1.168(i)–7, and 1.168(i)–8) ...........................................................................................................................904

.15 Disposition of a building or structural component (§ 168; § 1.168(i)–8) .......................................................................................907

.16 Dispositions of tangible depreciable assets (other than a building or its structuralcomponents) (§ 168; § 1.168(i)–8) .....................................................................................................................................................911

.17 Dispositions of tangible depreciable assets in a general asset account (§ 168(i)(4); § 1.168(i)–1)..............................................913

.18 Summary of certain changes in methods of accounting related to dispositions of MACRS property.........................................915

.19 Depreciation of fiber optic transfer node and fiber optic cable used by a cable system operator (§§ 167 and 168).................917

.20 Revocation of partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015–56 ................918

SECTION 7. RESEARCH AND EXPERIMENTAL EXPENDITURES (§ 174)...................................................................................918

.01 Changes to a different method or different amortization period......................................................................................................918

SECTION 8. ELECTIVE EXPENSING PROVISIONS (§ 179D) ...........................................................................................................919

.01 Deduction for Energy Efficient Commercial Buildings (§ 179D) ...................................................................................................919

SECTION 9. COMPUTER SOFTWARE EXPENDITURES (§§ 162, 167, and 197)...........................................................................920

.01 Computer software expenditures .........................................................................................................................................................920

SECTION 10. START-UP EXPENDITURES (§ 195)...............................................................................................................................920

.01 Start-up expenditures ............................................................................................................................................................................920

SECTION 11. CAPITAL EXPENDITURES (§ 263).................................................................................................................................920

.01 Package design costs ............................................................................................................................................................................920

.02 Line pack gas or cushion gas ..............................................................................................................................................................921

.03 Removal costs .......................................................................................................................................................................................921

.04 Distributor commissions.......................................................................................................................................................................921

.05 Intangibles..............................................................................................................................................................................................922

.06 Rotable spare parts safe harbor method. ............................................................................................................................................922

.07 Repairable and reusable spare parts....................................................................................................................................................922

.08 Tangible property..................................................................................................................................................................................923

.09 Railroad track structure expenditures..................................................................................................................................................926

.10 Remodel-refresh safe harbor method..................................................................................................................................................926

SECTION 12. UNIFORM CAPITALIZATION (UNICAP) METHODS (§ 263A) ...............................................................................928

.01 Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers ......................................................928

.02 Certain uniform capitalization (UNICAP) methods used by producers and reseller-producers ...................................................932

.03 Impact fees ............................................................................................................................................................................................933

.04 Change to capitalizing environmental remediation costs under § 263A.........................................................................................933

.05 Change in allocating environmental remediation costs under § 263A............................................................................................933

.06 Safe harbor methods under § 263A for certain dealerships of motor vehicles ..............................................................................933

.07 Change to not apply § 263A to one or more plants removed from the list of plants that have apreproductive period in excess of 2 years..........................................................................................................................................934

.08 Change to a reasonable allocation method described in § 1.263A–1(f)(4) for self-constructed assets........................................934

.09 Real property acquired through foreclosure .......................................................................................................................................935

Bulletin No. 2016–21 May 23, 2016881

.10 Sales-Based Royalties...........................................................................................................................................................................935

.11 Treatment of Sales-Based Vendor Chargebacks under a Simplified Method.................................................................................935

.12 U.S. ratio method..................................................................................................................................................................................936

.13 Depletion................................................................................................................................................................................................937

.14 Interest capitalization............................................................................................................................................................................938

SECTION 13. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS BETWEENRELATED TAXPAYERS (§ 267)......................................................................................................................................938

.01 Change to comply with § 267.............................................................................................................................................................938

SECTION 14. DEFERRED COMPENSATION (§ 404) ...........................................................................................................................938

.01 Deferred compensation.........................................................................................................................................................................938

.02 Grace period contributions...................................................................................................................................................................939

SECTION 15. METHODS OF ACCOUNTING (§ 446)...........................................................................................................................939

.01 Change in overall method from the cash method to an accrual method ........................................................................................939

.02 Multi-year insurance policies for multi-year service warranty contracts.........................................................................................941

.03 Taxpayers changing to overall cash method......................................................................................................................................941

.04 Nonaccrual-experience method............................................................................................................................................................942

.05 Interest accruals on short-term consumer loans-Rule of 78’s method.............................................................................................943

.06 Film producer’s treatment of certain creative property costs ...........................................................................................................943

.07 Deduction of incentive payments to health care providers...............................................................................................................943

.08 Change by bank for uncollected interest. ...........................................................................................................................................944

.09 Change from the cash method to an accrual method for specific items .........................................................................................944

.10 Multi-year service warranty contracts.................................................................................................................................................945

.11 Overall cash method for specified transportation industry taxpayers ..............................................................................................945

.12 Change to overall cash/hybrid method for certain banks .................................................................................................................946

.13 Change to overall cash method for farmers.......................................................................................................................................947

.14 Nonshareholder contributions to capital under § 118 .......................................................................................................................947

.15 Debt issuance costs...............................................................................................................................................................................948

SECTION 16. TAXABLE YEAR OF INCLUSION (§ 451) ....................................................................................................................948

.01 Accrual of interest on nonperforming loans.......................................................................................................................................948

.02 Advance rentals.....................................................................................................................................................................................948

.03 State or local income or franchise tax refunds ..................................................................................................................................949

.04 Capital Cost Reduction Payments.......................................................................................................................................................949

.05 Credit card annual fees.........................................................................................................................................................................949

.06 Credit card late fees..............................................................................................................................................................................949

.07 Advance payments................................................................................................................................................................................949

.08 Credit card cash advance fees .............................................................................................................................................................950

.09 Retainages..............................................................................................................................................................................................950

.10 Advance payments - change in applicable financial statements (AFS)...........................................................................................951

SECTION 17. OBLIGATIONS ISSUED AT DISCOUNT (§ 454) .........................................................................................................952

.01 Series E, EE, or I U.S. savings bonds................................................................................................................................................952

SECTION 18. PREPAID SUBSCRIPTION INCOME (§ 455).................................................................................................................952

.01 Prepaid subscription income................................................................................................................................................................952

SECTION 19. TAXABLE YEAR INCURRED (§ 461)............................................................................................................................952

.01 Timing of incurring liabilities for employee compensation..............................................................................................................953

(1) Self-insured employee medical benefits .........................................................................................................................................953

May 23, 2016 Bulletin No. 2016–21882

(2) Bonuses..............................................................................................................................................................................................953

(3) Vacation pay, sick pay, and severance pay....................................................................................................................................953

.02 Timing of incurring liabilities for real property taxes, personal property taxes, state income taxes,and state franchise taxes.......................................................................................................................................................................954

.03 Timing of incurring liabilities under a workers’ compensation act, tort, breach of contract, or violation of law......................954

.04 Timing of incurring certain liabilities for payroll taxes ....................................................................................................................955

.05 Cooperative advertising........................................................................................................................................................................955

.06 Timing of incurring certain liabilities for services or insurance ......................................................................................................956

.07 Rebates and allowances........................................................................................................................................................................956

.08 Ratable accrual of real property taxes ................................................................................................................................................956

.09 California Franchise Taxes ..................................................................................................................................................................956

.10 Gift cards issued as a refund for returned goods...............................................................................................................................956

.11 Timing of incurring liabilities under the recurring item exception to the economic performance rules......................................957

.12 Economic performance safe harbor for ratable service contracts ....................................................................................................957

SECTION 20. RENT (§ 467) ........................................................................................................................................................................957

.01 Change from an improper method of inclusion of rental income or expense to inclusion in accordancewith the rent allocation.........................................................................................................................................................................957

SECTION 21. INVENTORIES (§ 471)........................................................................................................................................................957

.01 Cash discounts.......................................................................................................................................................................................957

.02 Estimating inventory �shrinkage�.........................................................................................................................................................958

.03 Small taxpayer exception from requirement to account for inventories under § 471....................................................................958

.04 Qualifying volume-related trade discounts.........................................................................................................................................959

.05 Impermissible methods of identification and valuation.....................................................................................................................959

.06 Core Alternative Valuation Method....................................................................................................................................................959

.07 Replacement cost for automobile dealers’ parts inventory...............................................................................................................960

.08 Replacement cost for heavy equipment dealers’ parts inventory.....................................................................................................960

.09 Rotable spare parts................................................................................................................................................................................960

.10 Advance Trade Discount Method .......................................................................................................................................................960

.11 Permissible methods of identification and valuation.........................................................................................................................960

.12 Change in the official used vehicle guide utilized in valuing used vehicles ..................................................................................961

.13 Invoiced advertising association costs for new vehicle retail dealerships.......................................................................................961

.14 Rolling-average method of accounting for inventories .....................................................................................................................961

.15 Sales-Based Vendor Chargebacks.......................................................................................................................................................961

.16 Certain changes to the cost complement of the retail inventory method........................................................................................962

.17 Certain changes within the retail inventory method..........................................................................................................................962

SECTION 22. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (§ 472).................................................................................................962

.01 Change from the LIFO inventory method..........................................................................................................................................962

.02 Determining current-year cost under the LIFO inventory method ..................................................................................................963

.03 Alternative LIFO inventory method for retail automobile dealers...................................................................................................964

.04 Used vehicle alternative LIFO method...............................................................................................................................................964

.05 Determining the cost of used vehicles purchased or taken as a trade-in ........................................................................................965

.06 Change to the inventory price index computation (IPIC) method...................................................................................................965

.07 Changes within the inventory price index computation (IPIC) method..........................................................................................966

.08 Changes to the Vehicle-Pool Method.................................................................................................................................................966

.09 Changes within the used vehicle alternative LIFO method..............................................................................................................967

Bulletin No. 2016–21 May 23, 2016883

.10 Changes to dollar-value pools of manufacturers ...............................................................................................................................967

SECTION 23. MARK-TO-MARKET ACCOUNTING METHOD (§ 475)............................................................................................967

.01 Commodities dealers, securities traders, and commodities traders electing to use the mark-to-marketmethod of accounting under § 475(e) or (f) ......................................................................................................................................967

.02 Taxpayers requesting to change their method of accounting from the mark-to-market method ofaccounting described in § 475 to a realization method ....................................................................................................................968

SECTION 24. BANK RESERVES FOR BAD DEBTS (§ 585) ..............................................................................................................969

.01 Changing from the § 585 reserve method to the § 166 specific charge-off method .....................................................................969

SECTION 25. INSURANCE COMPANIES (§§ 816, 832, 833) ..............................................................................................................970

.01 Safe harbor method of accounting for premium acquisition expenses............................................................................................970

.02 Certain changes in method of accounting for organizations to which § 833 applies ....................................................................971

.03 Change in qualification as life/nonlife insurance company under § 816(a)....................................................................................971

SECTION 26. DISCOUNTED UNPAID LOSSES (§ 846).......................................................................................................................971

.01 Composite method for discounting unpaid losses .............................................................................................................................971

SECTION 27. REAL ESTATE MORTGAGE INVESTMENT CONDUIT (REMIC) (§§ 860A–860G)............................................972

.01 REMIC Inducement Fees.....................................................................................................................................................................972

SECTION 28. FUNCTIONAL CURRENCY (§ 985) ................................................................................................................................972

.01 Change in functional currency.............................................................................................................................................................972

SECTION 29. ORIGINAL ISSUE DISCOUNT (§§ 1272, 1273).............................................................................................................972

.01 De minimis original issue discount (OID) .........................................................................................................................................972

.02. Proportional method of accounting for OID on a pool of credit card receivables........................................................................972

SECTION 30. MARKET DISCOUNT BONDS (§ 1278) .........................................................................................................................973

.01 Revocation of § 1278(b) election........................................................................................................................................................973

SECTION 31. SHORT-TERM OBLIGATIONS (§ 1281).........................................................................................................................973

.01 Interest income on short obligations ...................................................................................................................................................973

.02 Stated interest on short-term loans of cash method banks ...............................................................................................................973

EFFECTIVE DATE........................................................................................................................................................................................974

EFFECT ON OTHER DOCUMENTS.........................................................................................................................................................975

PAPERWORK REDUCTION ACT .............................................................................................................................................................975

SIGNIFICANT CHANGES...........................................................................................................................................................................976

DRAFTING INFORMATION.......................................................................................................................................................................977

LIST OF AUTOMATIC CHANGES CONTACT LIST............................................................................................................................977

This revenue procedure provides theList of Automatic Changes to which theautomatic change procedures in Rev.Proc. 2015–13, 2015–5 I.R.B. 419, asclarified and modified by Rev. Proc.2015–33, 2015–24 I.R.B. 1067, and asmodified by Rev. Proc. 2016–1, 2016–1I.R.B. 1, (or successor) apply. The defini-tions in section 3 of Rev. Proc. 2015–13apply to this revenue procedure.

LIST OF AUTOMATIC CHANGES

SECTION 1. GROSS INCOME (§ 61)

.01 Up-front Payments for NetworkUpgrades received by Utilities.

(1) Description of change. This changeapplies to a Utility that wants to change itsmethod of accounting for Up-front Pay-ments to the safe harbor method describedin Rev. Proc. 2005–35, 2005–2 C.B. 76.In general, this change applies to a Utilitythat receives an Up-front Payment from aGenerator to finance Network Upgrades tothe Utility’s Transmission System. For

federal income tax purposes, if an Up-front Payment is made pursuant to an In-terconnection Agreement that satisfies allof the conditions of section 5.02 of Rev.Proc. 2005–35, a Utility may treat thatUp-front Payment as not being taxableincome under § 61 when received (thesafe harbor method). In addition, a Utilitythat uses the safe harbor method is notentitled to any deduction for its reim-bursements of the Up-front Payment. Tothe extent that Federal Energy RegulatoryCommission (FERC) interest is deduct-ible, it must be properly allocated to theperiods in which it accrues. A Utility us-

May 23, 2016 Bulletin No. 2016–21884

ing the safe harbor method must complywith all other applicable provisions ofRev. Proc. 2005–35. See Rev. Proc.2005–35 for the definitions of certainterms for purposes of this change.

(2) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section1.01 is “91.”

(3) Contact information. For further in-formation regarding a change under thissection, contact William E. Blanchard at(202) 317-3900 (not a toll-free call).

SECTION 2. COMMODITY CREDITLOANS (§ 77)

.01 Treating amounts received as loans.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for loans re-ceived from the Commodity Credit Cor-poration from including the loan amountin gross income for the taxable year inwhich each loan is received to treatingeach loan amount as a loan.

(2) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to this change.

(3) Manner of making change. Thischange is made on a cut-off basis andapplies only to loans received from theCommodity Credit Corporation on or afterthe beginning of the year of change. Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required.


(5) Contact information. For further in-formation regarding a change under thissection, contact William Ruane at (202)317-4718 (not a toll-free call).

SECTION 3. TRADE OR BUSINESSEXPENSES (§ 162)

.01 Advances made by a lawyer onbehalf of clients.

(1) Description of change. This changeapplies to a lawyer who advances moneyto pay for costs of litigation or for otherexpenses on behalf of clients, and who

wants to change the method of accountingfor such advances from treating them asdeductible business expenses to treatingthem as loans. This change applies tocases handled either on a non-contingentor a contingent fee basis. See Pelton &Gunther, P.C. v. Commissioner, T.C.Memo. 1999–339 (non-contingent fee);Canelo v. Commissioner, 53 T.C. 217(1969), aff’d per curiam, 447 F.2d 484(9th Cir. 1971) (contingent fee).


(3) Contact information. For further in-formation regarding a change under thissection, contact Peter Ford at (202) 317-7011(not a toll-free call).

.02 ISO 9000 costs.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for costs in-curred to obtain, maintain, and renew ISO9000 certification to conform with Rev.Rul. 2000–4, 2000–1 C.B. 331, as mod-ified by this revenue procedure.


(3) Contact information. For further in-formation regarding a change under thissection, contact Peter Ford at (202) 317-7011 (not a toll-free call).

.03 Restaurant or tavern smallwarespackages.

(1) Description of change. This changeapplies to a taxpayer engaged in the trade orbusiness of operating a restaurant or tavern(within the meaning of section 4.01 of Rev.Proc. 2002–12, 2002–1 C.B. 374) that wantsto change its method of accounting for thecosts of smallwares to the smallwaresmethod described in Rev. Proc. 2002–12, asmodified by this revenue procedure.



.04 Timber grower fertilization costs.

(1) Description of change. This changeapplies to a timber grower that wants tochange its method of accounting to treatpost-establishment fertilization costs of anestablished timber stand as ordinary andnecessary business expenses deductibleunder § 162. See Rev. Rul. 2004–62,2004–1 C.B. 1072, as modified by thisrevenue procedure.



.05 Materials and supplies.

See section 11.08 of this revenue pro-cedure.

.06 Repair and maintenance costs.

See section 11.08 of this revenue pro-cedure.

.07 Wireline network asset maintenanceallowance and units of property methodsof accounting under Rev. Proc. 2011–27.

(1) Description of change. This changeapplies to a wireline telecommunicationscarrier that is within the scope of Rev.Proc. 2011–27, 2011–18 I.R.B. 740, andwants to change its treatment of wirelinenetwork asset expenditures to use either(a) the wireline network asset mainte-nance allowance method of accounting, or(b) all or some of the units of propertydescribed in Rev. Proc. 2011–27.

(2) Section 481(a) adjustment. In gen-eral, a change to the wireline networkasset maintenance allowance method ofaccounting or to use all or some of theunits of property specified in Rev. Proc.2011–27 requires an adjustment under§ 481(a). The § 481(a) adjustment shallnot include any amount attributable toproperty for which the taxpayer elected to

Bulletin No. 2016–21 May 23, 2016885

apply the repair allowance under§ 1.167(a)–11(d)(2).


(4) Contact information. For further in-formation regarding a change under thissection, contact Lewis Saideman at (202)317-5100 (not a toll-free call).

.08 Wireless network asset maintenanceallowance and units of property methodsof accounting under Rev. Proc. 2011–28.

(1) Description of change. This changeapplies to a wireless telecommunicationscarrier that is within the scope of Rev.Proc. 2011–28, 2011–18 I.R.B. 743, andwants to change its treatment of wirelessnetwork asset expenditures to use either(a) the wireless network asset mainte-nance allowance method of accounting, or(b) all or some of the units of propertydescribed in Rev. Proc. 2011–28.

(2) Section 481(a) adjustment. In gen-eral, a change to the wireless networkasset maintenance allowance method ofaccounting or to use all or some of the unitsof property specified in Rev. Proc. 2011–28requires an adjustment under § 481(a). The§ 481(a) adjustment does not include anyamount attributable to property for whichthe taxpayer elected to apply the repair al-lowance under § 1.167(a)–11(d)(2).



.09 Method of accounting under Rev.Proc. 2011–43 for taxpayers in thebusiness of transporting, delivering, orselling electricity.

(1) Description of change. This changeapplies to a taxpayer that is within thescope of Rev. Proc. 2011–43, 2011–37I.R.B. 326, and wants to change its treat-ment of transmission and distributionproperty expenditures to use the method

of accounting described in Rev. Proc.2011–43.

(2) Section 481(a) adjustment. A tax-payer must take the entire net § 481(a)adjustment into account (whether positiveor negative) in computing taxable incomefor the year of change. The § 481(a) ad-justment does not include any amount at-tributable to property for which the tax-payer elected to apply the repairallowance under § 1.167(a)–11 (d)(2) forany taxable year in which the election wasmade. For guidance regarding permissible§ 481(a) calculation methodologies, seesection 7.02 and Appendix A of Rev.Proc. 2011–43.



.10 Method of accounting under Rev.Proc. 2013–24 for taxpayers in thebusiness of generating steam or electricpower.

(1) Description of change. This changeapplies to a taxpayer that is within thescope of Rev. Proc. 2013–24, 2013–22I.R.B. 1142, and wants to change its treat-ment of generation property expendituresto use all or some of the unit of propertydefinitions and the corresponding majorcomponent definitions described in Rev.Proc. 2013–24.

(2) Certain eligibility rules temporarilyinapplicable. The eligibility rules in sec-tions 5.01(1)(d) and (f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, do not applyto an eligible taxpayer that changes to themethod of accounting provided in Rev.Proc. 2013–24 for its first, second, or thirdtaxable year ending after December 30,2012.

(3) Section 481(a) adjustment.(a) A taxpayer must take the entire net

§ 481(a) adjustment into account (whetherpositive or negative) in computing taxableincome for the year of change. For guid-ance regarding the use of extrapolation incomputing a § 481(a) adjustment, see sec-tions 6.02 and Appendix B of Rev. Proc.2013–24.

(b) A taxpayer changing to this methodof accounting must not include in the§ 481(a) adjustment any amount attribut-able to property for which the taxpayerelected to apply the repair allowance un-der § 1.167(a)–11(d)(2) for any taxableyear in which the repair allowance elec-tion was made.


(5) Contact information. For further in-formation regarding a change under thissection, contact Lewis Saideman at (202)317-5100 (not a toll free call).

.11 Cable network asset capitalizationmethods of accounting under Rev. Proc.2015–12.

(1) Description of change. This changeapplies to a cable system operator that iswithin the scope of Rev. Proc. 2015–12,2015–2 I.R.B. 266, and wants to make oneor more of the of the following changes inmethod of accounting:

(a) Change its treatment of cable net-work asset expenditures to the cable net-work asset maintenance allowancemethod of accounting provided in section5 of Rev. Proc. 2015–12;

(b) Change to use any of the unit ofproperty definitions provided in section 6of Rev. Proc. 2015–12;

(c) Change to use the specific identifi-cation method for installations and cus-tomer drop costs described in section7.01(1) of Rev. Proc. 2015–12;

(d) Change to use the safe harbor allo-cation method for installations and cus-tomer drop costs described in section7.01(2) of Rev. Proc. 2015–12; or

(e) Change to deduct the labor costsassociated with installing customer prem-ises equipment under section 7.02 of Rev.Proc. 2015–12.

(2) Certain eligibility rules temporarilyinapplicable. The eligibility rules in sec-tion 5.01(1)(d) and (f) of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, do not apply to acable system operator that changes to amethod of accounting provided in section5, section 6, or section 7 of Rev. Proc.2015–12 for its first or second taxableyear ending after December 31, 2013.

May 23, 2016 Bulletin No. 2016–21886

(3) Concurrent automatic change. Ataxpayer that wants to make both one ormore changes in method of accountingpursuant to this section 3.11 and a changeto a UNICAP method under section 12 ofthis revenue procedure for the same yearof change should file a single Form 3115that includes all of these changes and mustenter the designated automatic accountingmethod change numbers for all of thesechanges on the appropriate line on theForm 3115. See section 6.03(1)(b) of Rev.Proc. 2015–13 for information on makingconcurrent changes.

(4) Section 481(a) adjustment.(a) In general, a change to one or more

of the of the changes in method of ac-counting described in section 3.11(1) ofthis revenue procedure requires an adjust-ment under § 481(a). The § 481(a) adjust-ment shall not include any amount attrib-utable to property for which the taxpayerelected to apply the repair allowance un-der § 1.167(a)–11(d)(2).

(b) Itemized listing on Form 3115. Thetaxpayer must include on Form 3115(Rev. December 2015), Part IV, line 26,the total § 481(a) adjustment for allchanges in methods of accounting beingmade. If the taxpayer is making more thanone change in method of accounting underRev. Proc. 2015–12, the taxpayer mustinclude on an attachment to Form 3115:

(i) the information required by Part IV,line 26 for each change in method ofaccounting (including the amount of the§ 481(a) adjustment for each change inmethod of accounting, which includes theportion of the § 481(a) adjustment attrib-utable to UNICAP);

(ii) the information required by Part II,line 14 of Form 3115 that is associatedwith each change; and

(iii) the citation to the paragraph ofRev. Proc. 2015–12 that provides for eachproposed method of accounting.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change to a method of ac-counting provided in section 5 or 6 ofRev. Proc. 2015–12 is “208.” The desig-nated automatic accounting methodchange number for a change to a methodof accounting provided in section 7 ofRev. Proc. 2015–12 is “209.”

(6) Contact information. For further in-formation regarding a change under thissection, contact Merrill Feldstein at (202)317-5100.

SECTION 4. BAD DEBTS (§ 166)

.01 Change from reserve method tospecific charge-off method.

(1) Description of change. This changeapplies to a taxpayer (other than a bank asdefined in § 585(a)(2)) that wants tochange its method of accounting for baddebts from a reserve method (or otherimproper method) to a specific charge-offmethod that complies with § 166. Forprocedures applicable to banks, see§ 585(c) and the regulations thereunderand section 24 of this revenue procedure.


(3) Contact information. For further in-formation regarding a change under thissection, contact Renay France at (202)317-7003 (not a toll-free call).

.02 Conformity election by bank afterprevious election automatically revoked.

(1) Description of change. This changeapplies to a bank that wants to change itsmethod of accounting for bad debts bymaking the conformity election under§ 1.166–2(d)(3)(iii)(C)(3).

(2) Applicability. This change only ap-plies to a bank (as defined in § 1.166–2(d)(4)(i)) that:

(a) is subject to supervision by Federalauthorities, or by state authorities main-taining substantially equivalent standards;

(b) has previously adopted or elected tochange to the method of accounting forbad debts described in § 1.166–2(d)(3);

(c) has had that previous election auto-matically revoked under § 1.166–2(d)(3)(iv)(C);

(d) meets the express determination re-quirement of § 1.166–2(d)(3)(iii)(D) forthe year of change; and

(e) now seeks the consent of the Com-missioner to make an election under§ 1.166–2(d)(3)(iii)(C)(3).

(3) Certain eligibility rule inapplica-ble. The eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to this change.


(5) Contact information. For further in-formation regarding a change under thissection, contact K. Scott Brown at (202)317-6945 (not a toll-free call).

SECTION 5. INTEREST EXPENSE(§ 163) AND AMORTIZABLE BONDPREMIUM (§ 171)

.01 Revocation of § 171(c) election.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for amortizablebond premium by revoking its § 171(c)election. Under § 171(c), a taxpayer thatholds certain taxable bonds may elect toamortize any bond premium on the bondsin accordance with regulations prescribedby the Secretary. Sections 1.171–1through 1.171–5 provide rules relating tothe amortization of bond premium by ataxpayer. Section 1.171–4 provides theprocedures to make a § 171(c) election toamortize bond premium.

(2) Revocation of election. The revoca-tion of a § 171(c) election applies to alltaxable bonds that are held by the tax-payer on the first day of the first taxableyear for which the revocation is effective(year of change), and to all taxable bondsthat are subsequently acquired by the tax-payer.

(3) Manner of making change. Thischange is made using a cut-off basis andapplies only to taxable bonds held on orafter the beginning of the year of change.Accordingly, a § 481(a) adjustment is nei-ther permitted nor required.

Under the cut-off basis, for taxablebonds held at the beginning of the year ofchange, the taxpayer may not amortizeany remaining bond premium on thebonds. Because the cut-off basis is pre-scribed for this change, the basis of anybond, adjusted for amounts previouslyamortized during the period of the elec-tion, is not affected by the revocation.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method change

Bulletin No. 2016–21 May 23, 2016887

number for a change under this section5.01 is “16.”

(5) Additional requirements. On astatement attached to the Form 3115, thetaxpayer must provide:

(a) the reason(s) for revoking the elec-tion; and

(b) a description of the method bywhich, and the date on which, the tax-payer made the § 171(c) election that isproposed to be revoked.

(6) Audit protection. Any audit protec-tion applicable to this change under sec-tion 8 of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not preclude the Com-missioner from examining the methodused by the taxpayer to determine theamount of amortizable bond premium un-der § 171(b) for a taxable year prior to theyear of change.


.02 Change to comply with § 163(e)(3).

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method or methods of accountingto comply with the requirements of§ 163(e)(3), which defers certain deduc-tions attributable to original issue discountdebt instruments held by related foreignpersons. Any portion of the original issuediscount will not be allowable as a deduc-tion to the U.S. person issuer until paid.

(2) Accelerated § 481(a) adjustmentperiod in certain situations. In addition tothe circumstances set forth in section7.03(4) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, the § 481 adjustment periodprovided in section 7.03 of Rev. Proc.2015–13 will be accelerated for a U.S.person with a remaining balance of a§ 481(a) adjustment that arose by reasonof a change in method of accounting de-scribed in this section 5.02 if a debt in-strument subject to the change is paid off,retired, or significantly modified withinthe meaning of § 1.1001–3 prior to the endof the § 481(a) adjustment period. Theportion of the remaining § 481(a) adjust-ment attributable to the debt instrumentmust be taken into account in the taxableyear the debt instrument is paid off, re-tired, or significantly modified within themeaning of § 1.1001–3.


(4) Contact information. For further in-formation regarding a change under thissection, contact Joseph Vetting at (202)317-4960 (not a toll-free call).

SECTION 6. DEPRECIATION ORAMORTIZATION (§ 56(a)(1),56(g)(4)(A), 167, 168, 197, 280F(a),1400I, 1400L, or 1400N(d), ORFORMER § 168)

.01 Impermissible to permissible methodof accounting for depreciation oramortization.

(1) Description of change.(a) Applicability. This change applies

to a taxpayer that wants to change from animpermissible to a permissible method ofaccounting for depreciation or amortiza-tion (depreciation) for any item of depre-ciable or amortizable property under thetaxpayer’s present or proposed method ofaccounting:

(i) for which the taxpayer used the im-permissible method of accounting in atleast two taxable years immediately pre-ceding the year of change (but see section6.01(1)(b) of this revenue procedure forproperty placed in service in the taxableyear immediately preceding the year ofchange);

(ii) for which the taxpayer is making achange in method of accounting under§ 1.446–1(e)(2)(ii)(d);

(iii) for which depreciation is deter-mined under § 56(a)(1), § 56(g)(4)(A),§ 167, § 168, § 197, § 1400I, or§ 1400L(c), under § 168 prior to itsamendment in 1986 (former § 168), orunder any additional first year deprecia-tion deduction provision of the Code (forexample, § 168(k), § 168(l), § 1400L(b),or § 1400N(d)); and

(iv) that is owned by the taxpayer at thebeginning of the year of change (but seesection 6.07 of this revenue procedure forproperty disposed of before the year ofchange).

(b) Taxpayer has not adopted a methodof accounting for the item of property. If ataxpayer does not satisfy section6.01(1)(a)(i) of this revenue procedure foran item of depreciable or amortizable

property because this item of property isplaced in service by the taxpayer in thetaxable year immediately preceding theyear of change (“1-year depreciable prop-erty”), the taxpayer may change from theimpermissible method of determining de-preciation to the permissible method ofdetermining depreciation for the 1-yeardepreciable property by filing a Form3115 for this change, provided the§ 481(a) adjustment reported on the Form3115 includes the amount of any adjust-ment that is attributable to all property(including the 1-year depreciable prop-erty) subject to the Form 3115. Alterna-tively, the taxpayer may change from theimpermissible method of determining de-preciation to the permissible method ofdetermining depreciation for a 1-year de-preciable property by filing an amendedfederal tax return for the property’splaced-in-service year prior to the date thetaxpayer files its federal tax return for thetaxable year succeeding the placed-in-service year.

(c) Inapplicability. This change doesnot apply to:

(i) any property to which § 1016(a)(3)(regarding property held by a tax-exemptorganization) applies;

(ii) a taxpayer that is required under§ 263A and the regulations thereunder tocapitalize the costs with respect to whichthe taxpayer wants to change its methodof accounting under this section 6.01 if thetaxpayer is not capitalizing these costs,unless the taxpayer concurrently changesits method to capitalize these costs in con-junction with a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable);

(iii) any property for which a taxpayeris making a change in depreciation under§ 1.446–1(e)(2)(ii)(d)(2)(vi) or (vii);

(iv) any property subject to § 167(g)regarding property depreciated under theincome forecast method;

(v) any § 1250 property that a taxpayeris reclassifying to an asset class of Rev.Proc. 87–56, 1987–2 C.B. 674 (as clari-fied and modified by Rev. Proc. 88–22,1988–1 C.B. 785), or Rev. Proc. 83–35,1983–1 C.B. 745, as appropriate, that doesnot explicitly include § 1250 property (forexample, asset class 57.0, DistributiveTrades and Services);

May 23, 2016 Bulletin No. 2016–21888

(vi) any property for which a taxpayeris revoking a timely valid election, ormaking a late election, under § 167, § 168,§ 179, § 1400I, § 1400L(c), former § 168,§ 13261(g)(2) or (3) of the Revenue Rec-onciliation Act of 1993 (1993 Act),1993–3 C.B. 1, 128 (relating to amortiz-able § 197 intangibles), or any additionalfirst year depreciation deduction provisionof the Code (for example, § 168(k),§ 168(l), § 1400L(b), or § 1400N(d)). Ataxpayer may request consent to revoke ormake the election by submitting a requestfor a letter ruling under Rev. Proc.2016–1, 2016–1 I.R.B. 1 (or successor).However, if a taxpayer is revoking ormaking an election under § 179, see§ 179(c) and § 1.179–5. See § 1.446–1(e)(2)(ii)(d)(3)(iii);

(vii) any property for which deprecia-tion is determined under § 56(g)(4)(A) or§ 167 (other than under § 168, § 1400I,§ 1400L(c), former § 168, or any additionalfirst year depreciation deduction provisionof the Code (for example, § 168(k), § 168(l),§ 1400L(b), or § 1400N(d))) and a taxpayeris changing the useful life of the property. Achange in the useful life of property is cor-rected by adjustments in the applicable tax-able year provided under § 1.446–1(e)(2)(ii)(d)(5)(iv). However, this section6.01(1)(c)(vii) does not apply if the tax-payer is changing to or from a useful life,recovery period, or amortization periodthat is specifically assigned by the Code(for example, § 167(f)(1), § 168(c)), theregulations thereunder, or other guidancepublished in the Internal Revenue Bulletinand, therefore, this change is a change inmethod of accounting (unless section6.01(1)(c)(xv) of this revenue procedureapplies). See § 1.446–1(e)(2)(ii)(d)(3)(i);

(viii) any depreciable property for whichthe use changes in the hands of the sametaxpayer. See § 1.446–1(e)(2)(ii)(d)(3)(ii);

(ix) any property for which deprecia-tion is determined in accordance with§ 1.167(a)–11 (regarding the Class Life As-set Depreciation Range System (ADR));

(x) any change in method of account-ing involving a change from deducting thecost or other basis of any property as anexpense to capitalizing and depreciatingthe cost or other basis, or vice versa (butsee section 11.08 of this revenue proce-dure for making such a change in method

of accounting under the final tangibleproperty regulations);

(xi) any change in method of account-ing involving a change from one permis-sible method of accounting for the prop-erty to another permissible method ofaccounting for the property. For example:

(A) a change from the straight-linemethod of depreciation to the incomeforecast method of depreciating for video-cassettes. See Rev. Rul. 89–62, 1989–1C.B. 78; or

(B) a change from charging the depre-ciation reserve with costs of removal andcrediting the depreciation reserve withsalvage proceeds to deducting costs ofremoval as an expense (provided the costsof removal are not required to be capital-ized under any provision of the Code,such as § 263(a)) and including salvageproceeds in taxable income (see section6.02 of this revenue procedure for makingthis change for property for which depre-ciation is determined under § 167);

(xii) any change in method of account-ing involving both a change from treatingthe cost or other basis of the property asnondepreciable or nonamortizable prop-erty to treating the cost or other basis ofthe property as depreciable or amortizableproperty and the adoption of a method ofaccounting for depreciation requiring anelection under § 167, § 168, § 1400I,§ 1400L(c), former § 168, § 13261(g)(2)or (3) of the 1993 Act, or any additionalfirst year depreciation deduction provisionof the Code (for example, § 168(k),§ 168(l), § 1400L(b), or § 1400N(d)) (forexample, a change in the treatment of thespace consumed in landfills placed in ser-vice in 2006 from nondepreciable to de-preciable property (assuming section6.01(1)(c)(xiii) of this revenue proceduredoes not apply) and the making of anelection under § 168(f)(1) to depreciatethis property under the unit-of-productionmethod of depreciation under § 167);

(xiii) any change in method of account-ing for any item of income or deductionother than depreciation, even if the changeresults in a change in computing depreci-ation under § 1.446–1(e)(2)(ii)(d)(2)(i),(ii), (iii), (iv), (v), (vi), (vii), or (viii). Forexample, a change in method of account-ing involving:

(A) a change in inventory costs (forexample, when property is reclassified

from inventory property to depreciableproperty, or vice versa) (but see section11.02 of this revenue procedure for mak-ing a change in method of accountingfrom inventory property to depreciableproperty for unrecoverable line pack gasor unrecoverable cushion gas, and section11.06 of this revenue procedure for mak-ing a change in method of accountingfrom inventory property to depreciableproperty for rotable spare parts); or

(B) a change in the character of a trans-action from sale to lease, or vice versa(but see section 6.03 of this revenue pro-cedure for making this change);

(xiv) a change from determining depre-ciation under § 168 to determining depre-ciation under former § 168 for any propertysubject to the transition rules in § 203(b) or§ 204(a) of the Tax Reform Act of 1986,1986–3 (Vol. 1) C.B. 1, 60–80;

(xv) any change in the placed-in-service date of a depreciable or amortiz-able property. This change is corrected byadjustments in the applicable taxable yearprovided under § 1.446–1(e)(2)(ii)(d)(5)(v); or

(xvi) any property for which the tax-payer has claimed a federal income taxcredit (e.g., the rehabilitation credit under§ 47).

(2) Certain eligibility rules inapplica-ble. The eligibility rule in section5.01(1)(d) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to this change.If during any of the five taxable yearsending with the year of change, a taxpayerrequested or made a change in method ofaccounting from expensing to capitaliz-ing, or vice versa, the cost or other basisof an asset, the eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13 is notapplicable to a change under this section6.01 for that same asset.

(3) Additional requirements. A tax-payer also must comply with the following:

(a) Permissible method of accountingfor depreciation. A taxpayer must changeto a permissible method of accounting fordepreciation for the item of depreciable oramortizable property. The permissiblemethod of accounting is the same methodthat determines the depreciation allowablefor the item of property (as provided insection 6.01(7) of this revenue procedure).

(b) Statements required. A taxpayer(including a qualified small taxpayer asdefined in section 6.01(4)(b) of this reve-

Bulletin No. 2016–21 May 23, 2016889

nue procedure) must provide the follow-ing statements, if applicable, and attachthem to the completed Form 3115:

(i) a detailed description of the presentand proposed methods of accounting. Ageneral description of these methods ofaccounting is unacceptable (for example,MACRS to MACRS, erroneous method toproper method, claiming less than the de-preciation allowable to claiming the de-preciation allowable);

(ii) to the extent not provided else-where on the Form 3115, a statement de-scribing the taxpayer’s business orincome-producing activities. Also, if thetaxpayer has more than one business orincome-producing activity, a statementdescribing the taxpayer’s business orincome-producing activity in which theitem of property at issue is primarily usedby the taxpayer;

(iii) to the extent not provided else-where on the Form 3115, a statement ofthe facts and law supporting the proposedmethod of accounting, new classificationof the item of property, and new assetclass in, as appropriate, Rev. Proc. 87–56or Rev. Proc. 83–35. If the taxpayer is theowner and lessor of the item of property atissue, the statement of the facts and lawsupporting the new asset class also mustdescribe the business or income-producing activity in which that item ofproperty is primarily used by the lessee;

(iv) to the extent not provided else-where on the Form 3115, a statementidentifying the year in which the item ofproperty was placed in service by the tax-payer;

(v) if any item of property is publicutility property within the meaning of§ 168(i)(10) or former § 167(I)(3)(A), asapplicable, a statement providing that thetaxpayer agrees to the following addi-tional terms and conditions:

(A) a normalization method of ac-counting (within the meaning of former§ 167(I)(3)(G), former § 168(e)(3)(B), or§ 168(i)(9), as applicable) will be used forthe public utility property subject to theForm 3115;

(B) as of the beginning of the year ofchange, the taxpayer will adjust its de-ferred tax reserve account or similar re-serve account in the taxpayer’s regulatorybooks of account by the amount of thedeferral of federal income tax liability as-

sociated with the § 481(a) adjustment ap-plicable to the public utility property sub-ject to the Form 3115; and

(C) within 30 calendar days of filingthe federal income tax return for the yearof change, the taxpayer will provide acopy of the completed Form 3115 to anyregulatory body having jurisdiction overthe public utility property subject to theForm 3115;

(vi) if the taxpayer is changing the clas-sification of an item of § 1250 propertyplaced in service after August 19, 1996, toa retail motor fuels outlet under§ 168(e)(3)(E)(iii), a statement containingthe following representation: “For pur-poses of § 168(e)(3)(E)(iii) of the InternalRevenue Code, the taxpayer representsthat (A) 50 percent or more of the grossrevenue generated from the item of § 1250property is from the sale of petroleumproducts (not including gross revenuefrom related services, such as the laborcost of oil changes and gross revenuefrom the sale of nonpetroleum productssuch as tires and oil filters), (B) 50 percentor more of the floor space in the item ofproperty is devoted to the sale of petro-leum products (not including floor spacedevoted to related services, such as oilchanges and floor space devoted to non-petroleum products such as tires and oilfilters), or (C) the item of § 1250 propertyis 1,400 square feet or less.”; and

(vii) if the taxpayer is changing theclassification of an item of property from§ 1250 property to § 1245 property under§ 168 or former § 168, a statement of thefacts and law supporting the new § 1245property classification, and a statementcontaining the following representation:“Each item of depreciable property that isthe subject of the Form 3115 filed undersection 6.01 of Rev. Proc. 2016–29 forthe year of change beginning [Insert thedate], and that is reclassified from [Insert,as appropriate: nonresidential real prop-erty, residential rental property, qualifiedleasehold improvement property, quali-fied restaurant property, qualified retailimprovement property, 19-year real prop-erty, 18-year real property, or 15-yearreal property] to an asset class of [Insert,as appropriate, either: Rev. Proc. 87–56,1987–2 C.B. 674, or Rev. Proc. 83–35,1983–1 C.B. 745] that does not explicitly

include § 1250 property, is § 1245 prop-erty for depreciation purposes.”

(4) Reduced filing requirement forqualified small taxpayers.

(a) In general. A qualified small tax-payer, as defined in section 6.01(4)(b) ofthis revenue procedure, is required tocomplete only the following informationon Form 3115 (Rev. December 2015) tomake this change:(a) The identification section of page 1

(above Part I);(b) The signature section at the bottom of

page 1;(c) Part I;(d) Part II, all lines except lines 13, 15b,

16c, 17, and 19;(e) Part IV, all lines except line 25; and(f) Schedule E.

(b) Definition of qualified small tax-payer. A “qualified small taxpayer” is ataxpayer whose average annual gross re-ceipts, as determined under § 1.263(a)–3(h)(3), for the three preceding taxableyears is less than or equal to $10,000,000.

(5) Section 481(a) adjustment. Becausethe adjusted basis of the property ischanged as a result of a method changemade under this section 6.01 (see section6.01(6) of this revenue procedure), itemsare duplicated or omitted. Accordingly,this change is made with a § 481(a) ad-justment. This adjustment may result ineither a negative § 481(a) adjustment (adecrease in taxable income) or a positive§ 481(a) adjustment (an increase in tax-able income) and may be a differentamount for regular tax, alternative mini-mum tax, and adjusted current earningspurposes. This § 481(a) adjustment equalsthe difference between the total amount ofdepreciation taken into account in com-puting taxable income for the propertyunder the taxpayer’s present method ofaccounting (including the amount attribut-able to any property described in section6.01(1)(b) of this revenue procedure thatis included in the taxpayer’s Form 3115),and the total amount of depreciation al-lowable for the property under the taxpay-er’s proposed method of accounting (asdetermined under section 6.01(7) of thisrevenue procedure, and including theamount attributable to any property de-scribed in section 6.01(1)(b) of this reve-nue procedure that is included in the tax-payer’s Form 3115), for open and closed

May 23, 2016 Bulletin No. 2016–21890

years prior to the year of change. How-ever, the amount of the § 481(a) adjust-ment must be adjusted to account for theproper amount of the depreciation allow-able that is required to be capitalized un-der any provision of the Code (for exam-ple, § 263A) at the beginning of the yearof change.

(6) Basis adjustment. As of the begin-ning of the year of change, the basis ofdepreciable property to which this section6.01 applies must reflect the reductionsrequired by § 1016(a)(2) for the depreci-ation allowable for the property (as deter-mined under section 6.01(7) of this reve-nue procedure).

(7) Meaning of depreciation allowable.(a) In general. Section 6.01(7) of this

revenue procedure provides the amount ofthe depreciation allowable determined un-der § 56(a)(1), § 56(g)(4)(A), § 167,§ 168, § 197, § 1400I, or § 1400L(c), orformer § 168. This amount, however, maybe limited by other provisions of the Code(for example, § 280F).

(b) Section 56(a)(1) property. The de-preciation allowable for any taxable yearfor property for which depreciation is de-termined under § 56(a)(1) is determinedby using the depreciation method, recov-ery period, and convention provided forunder § 56(a)(1) that applies for the prop-erty’s placed-in-service date.

(c) Section 56(g)(4)(A) property. Thedepreciation allowable for any taxableyear for property for which depreciation isdetermined under § 56(g)(4)(A) is deter-mined by using the depreciation method,recovery period or useful life, as applica-ble, and convention provided for under§ 56(g)(4)(A) that applies for the proper-ty’s placed-in-service date.

(d) Section 167 property. Generally,for any taxable year, the depreciation al-lowable for property for which deprecia-tion is determined under § 167, is deter-mined either:

(i) under the depreciation method ad-opted by the taxpayer for the property; or

(ii) if that depreciation method doesnot result in a reasonable allowance fordepreciation or the taxpayer has not ad-opted a depreciation method for the prop-erty, under the straight-line depreciationmethod.

For determining the estimated usefullife and salvage value of the property, see§ 1.167(a)–1(b) and (c), respectively.

The depreciation allowable for any tax-able year for property subject to § 167(f)(regarding certain property excluded from§ 197) is determined by using the depre-ciation method and useful life prescribedin § 167(f). If computer software is depre-ciated under § 167(f)(1) and is qualifiedproperty (as defined in § 168(k)(2) and§ 1.168(k)–1), 50-percent bonus depreci-ation property (as defined in § 168(k)(4)(as in effect on the day before the date ofenactment of the Economic Stimulus Actof 2008, Pub. L. No. 110–185, 122 Stat.613 (February 13, 2008)) and § 1.168(k)–1), qualified disaster assistance property(as defined in § 168(n)(2)), qualified NewYork Liberty Zone (Liberty Zone) prop-erty (as defined in § 1400L(b)(2) and§ 1.1400L(b)–1), qualified Gulf Opportu-nity Zone (GO Zone) property (as definedin § 1400N(d)(2) and sections 2.02 and2.03 of Notice 2006–77, 2006–2 C.B.590, as clarified, modified, and amplifiedby Notice 2007–36, 2007–1 C.B. 1000),specified Gulf Opportunity Zone exten-sion property (GO Zone extension prop-erty) (as defined in § 1400N(d)(6) andsection 4 of Notice 2007–36), or qualifiedRecovery Assistance (RA) property (asdefined in sections 2.02 and 2.03 of No-tice 2008–67, 2008–32 I.R.B. 307), thedepreciation allowable for that computersoftware under § 167(f)(1) is also deter-mined by taking into account the addi-tional first year depreciation deductionprovided by § 168(k), § 168(n),§ 1400L(b), or § 1400N(d), or by§ 15345(a)(1) and (d)(1) of the Food,Conservation, and Energy Act of 2008,Pub. L. No. 110–246, 122 Stat. 1651(June 18, 2008), as applicable, unless thetaxpayer made a timely valid election notto deduct any additional first year depre-ciation for the computer software.

(e) Section 168 property. The depreci-ation allowable for any taxable year forproperty for which depreciation is deter-mined under § 168, is determined as fol-lows:

(i) by using either:(A) the general depreciation system in

§ 168(a); or(B) the alternative depreciation system

in § 168(g) if the property is required to be

depreciated under the alternative depreci-ation system pursuant to § 168(g)(1) orother provisions of the Code (for example,property described in § 263A(e)(2)(A) or§ 280F(b)(1)). Property required to be de-preciated under the alternative deprecia-tion system pursuant to § 168(g)(1) in-cludes property in a class (as set out in§ 168(e)) for which the taxpayer made atimely valid election under § 168(g)(7);

(ii) if the property is qualified property,50-percent bonus depreciation property,qualified disaster assistance property, Lib-erty Zone property, GO Zone property,GO Zone extension property, or RA prop-erty, by also taking into account the addi-tional first year depreciation deduction pro-vided by § 168(k), § 168(n), § 1400L(b), or§ 1400N(d), or by § 15345(a)(1) and (d)(1)of the Food, Conservation, and Energy Actof 2008, as applicable, unless the taxpayermade a timely valid election not to deductthe additional first year depreciation (ormade a deemed election not to deduct theadditional first year depreciation; for furtherguidance, see, for example, Rev. Proc.2002–33, 2002–1 C.B. 963, Rev. Proc.2003–50, 2003–2 C.B. 119, Notice 2006–77, Notice 2008–67, section 5 of Rev. Proc.2011–26, 2011–16 I.R.B. 664, or Rev. Proc.2015–48, 2015–40 I.R.B. 469) for the classof property (as defined in § 1.168(k)–1(e)(2), § 1.1400L(b)–1(e)(2), or section4.02 of Notice 2006–77, as applicable) inwhich that property is included;

(iii) if the property is qualified secondgeneration biofuel plant property (as de-fined in § 168(l)(2) and (3)) or qualifiedcellulosic biofuel plant property (as de-fined in former § 168(l)(2) and (3)), byalso taking into account the additional firstyear depreciation deduction provided by§ 168(l)(1), unless the taxpayer made atimely valid election not to deduct theadditional first year depreciation for theproperty; and

(iv) if the property is qualified reuseand recycling property (as defined in§ 168(m)(2)), by also taking into accountthe additional first year depreciation de-duction provided by § 168(m)(1), unlessthe taxpayer made a timely valid electionnot to deduct the additional first year de-preciation for the property.

(f) Section 197 property. The amorti-zation allowable for any taxable year foran amortizable § 197 intangible (including

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any property for which a timely electionunder § 13261(g)(2) of the 1993 Act wasmade) is determined in accordance with§ 1.197–2(f).

(g) Former § 168 property. The depre-ciation allowable for any taxable year forproperty subject to former § 168 is deter-mined by using either:

(i) the accelerated method of cost re-covery applicable to the property (for ex-ample, for 5-year property, the recoverymethod under former § 168(b)(1)); or

(ii) the straight-line method applicableto the property if the property is requiredto be depreciated under the straight-linemethod (for example, property described informer § 168(f)(2) or former § 280F(b)(2))or if the taxpayer elected to determine thedepreciation allowance under the optionalstraight-line percentage (for example, thestraight-line method in former § 168(b)(3)).

(h) Qualified revitalization building.The depreciation allowable for any tax-able year for any qualified revitalizationbuilding (as defined in § 1400I(b)(1)) forwhich the taxpayer has made a timelyvalid election under § 1400I(a) is deter-mined as follows:

(i) if the taxpayer elected to deductone-half of any qualified revitalization ex-penditures (as defined in § 1400I(b)(2)and as limited by § 1400I(c)) chargeableto a capital account with respect to thequalified revitalization building for thetaxable year in which the building isplaced in service by the taxpayer, the de-preciation allowable for the qualified re-vitalization building’s placed-in-serviceyear is equal to one-half of the qualifiedrevitalization expenditures for the build-ing and the depreciation allowable for theremaining depreciable basis of the quali-fied revitalization building for its placed-in-service year and subsequent taxableyears is determined using the general de-preciation system of § 168(a) or the alter-native depreciation system of § 168(g), asapplicable; or

(ii) if the taxpayer elected to amortizeall of the qualified revitalization expendi-tures chargeable to a capital account withrespect to the qualified revitalizationbuilding ratably over the 120-month pe-riod beginning with the month in whichthe building is placed in service, the de-preciation allowable for the qualified re-vitalization expenditures is determined in

accordance with this election and the de-preciation allowable for the remaining de-preciable basis of the qualified revitaliza-tion building is determined using thegeneral depreciation system of § 168(a) orthe alternative depreciation system of§ 168(g), as applicable.

(i) Qualified New York Liberty Zoneleasehold improvement property. The de-preciation allowable for any taxable yearfor qualified New York Liberty Zoneleasehold improvement property (as de-fined in § 1400L(c)(2)) is determined byusing the depreciation method and recov-ery period prescribed in § 1400L(c) unlessthe taxpayer made a timely valid electionunder § 1400L(c)(5) not to use that recov-ery period.

(8) Concurrent automatic change.(a) A taxpayer making this change for

more than one asset for the same year ofchange should file a single Form 3115 forall such assets and provide a single net§ 481(a) adjustment for all the changesincluded in that Form 3115. If one or moreof the changes in that single Form 3115generate a negative § 481(a) adjustmentand other changes in that same Form 3115generate a positive § 481(a) adjustment,the taxpayer may provide a single nega-tive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such adjustment and asingle positive § 481(a) adjustment for allthe changes that are included in that Form3115 generating such adjustment. For ex-ample, a taxpayer files a single Form 3115to change the depreciation methods, re-covery periods, and/or conventions under§ 168(a) resulting from the reclassificationof two computers from nonresidential realproperty to 5-year property, one officedesk from nonresidential real property to7-year property, and two office desksfrom 5-year property to 7-year property.On that Form 3115, the taxpayer mustprovide either (i) a single net § 481(a)adjustment that covers all the changesresulting from all of these reclassifica-tions, or (ii) a single negative § 481(a)adjustment that covers the changes re-sulting from the reclassifications of thetwo computers and one office desk fromnonresidential real property to 5-yearproperty and 7-year property, respec-tively, and a single positive § 481(a)adjustment that covers the changes re-

sulting from the reclassifications of thetwo office desks from 5-year property to7-year property.

(b) A taxpayer making both thischange and a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for bothchanges, in which case the taxpayer mustenter the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes. For example, a qualifiedsmall taxpayer must include on the singleForm 3115 the information required bysection 6.01(4)(a) of this revenue proce-dure for this change and the informationrequired by the lines on Form 3115 appli-cable to the UNICAP method change, in-cluding Part II line 14 and 15, Part IV, andSchedule D, and must include a separateresponse to each line on Form 3115 that isapplicable to both changes (such as Part IIlines 6b, 7, 8b, 14, and, as applicable forthis change, Part IV) for which the tax-payer’s response is different for thischange and the change to a UNICAPmethod.


(10) Contact information. For furtherinformation regarding a change under thissection, contact Charles Magee at (202)317-7005 (not a toll-free call).

.02 Permissible to permissible method ofaccounting for depreciation.

(1) Description of change. This changeapplies to a taxpayer that wants to changefrom a permissible method of accountingfor depreciation under § 56(g)(4)(A)(iv)or § 167 to another permissible method ofaccounting for depreciation under§ 56(g)(4)(A)(iv) or § 167. Pursuant to§ 1.167(a)–7(a) and (c), a taxpayer mayaccount for depreciable property either bytreating each individual asset as an ac-count or by combining two or more assetsin a single account and, for each account,depreciation allowances are computedseparately.

May 23, 2016 Bulletin No. 2016–21892

(2) Applicability.(a) In general. This change applies to

any taxpayer wanting to make a change inmethod of accounting for depreciationspecified in section 6.02(4) of this revenueprocedure for the property in an account:

(i) for which the present and proposedmethods of accounting for depreciationspecified in section 6.02(4) of this revenueprocedure are permissible methods for theproperty under § 56(g)(4)(A)(iv) or § 167;and

(ii) that is owned by the taxpayer at thebeginning of the year of change.

(b) Inapplicability. This change doesnot apply to:

(i) a taxpayer that is required under§ 263A and the regulations thereunder tocapitalize the costs with respect to whichthe taxpayer wants to change its methodof accounting under this section 6.02 if thetaxpayer is not capitalizing these costs,unless the taxpayer concurrently changesits method to capitalize these costs in con-junction with a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable);

(ii) any property to which § 1016(a)(3)(regarding property held by a tax-exemptorganization) applies;

(iii) any property described in § 167(f)(regarding certain property excluded from§ 197);

(iv) any property subject to § 167(g)(regarding property depreciated under theincome forecast method);

(v) any property for which deprecia-tion is determined under § 56(a)(1),§ 56(g)(4)(A)(i), (ii), (iii), or (v), § 168,§ 1400I, § 1400L(c), § 168 prior to itsamendment in 1986 (former § 168), orany additional first year depreciation de-duction provision of the Code (for ex-ample, § 168(k), § 168(l), § 1400L(b),or § 1400N(d));

(vi) any property that the taxpayerelected under § 168(f)(1) or former§ 168(e)(2) to exclude from the applicationof, respectively, § 168 or former § 168;

(vii) any property for which deprecia-tion is determined in accordance with§ 1.167(a)–11 (ADR);

(viii) any depreciable property forwhich the taxpayer is changing the depre-ciation method pursuant to § 1.167(e)–1(b)(change from declining-balance method to

straight-line method), § 1.167(e)–1(c) (cer-tain changes for § 1245 property), or§ 1.167(e)–1(d) (certain changes for § 1250property). These changes must be made pro-spectively and are not permitted under thecited regulations for property for which thedepreciation is determined under § 168,§ 1400I, § 1400L(c), former § 168, or anyadditional first year depreciation deductionprovision of the Code (for example, § 168(k),§ 168(l), § 1400L(b), or § 1400N(d)); or

(ix) any distributor commissions (asdefined by section 2 of Rev. Proc. 2000–38, 2000–2 C.B. 310, as modified by Rev.Proc. 2007–16, 2007–1 C.B. 358) forwhich the taxpayer is changing the usefullife under the distribution fee periodmethod or the useful life method (both de-scribed in Rev. Proc. 2000–38). A changein this useful life is corrected by adjustmentsin the applicable taxable year provided un-der § 1.446–1(e)(2)(ii)(d)(5)(iv).

(3) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(d) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to this change.

(4) Changes covered. This section 6.02only applies to the following changes inmethods of accounting for depreciation:

(a) a change from the straight-linemethod to the sum-of-the-years-digitsmethod, the sinking fund method, the unit-of-production method, or the declining-balance method using any proper percent-age of the straight-line rate;

(b) a change from the declining-balance method using any percentage ofthe straight-line rate to the sum-of-the-years-digits method, the sinking fundmethod, or the declining-balance methodusing a different proper percentage of thestraight-line rate;

(c) a change from the sum-of-the-years-digits method to the sinking fundmethod, the declining-balance method us-ing any proper percentage of the straight-line rate, or the straight-line method;

(d) a change from the unit-of-productionmethod to the straight-line method;

(e) a change from the sinking fundmethod to the straight-line method, theunit-of-production method, the sum-of-the-years-digits method, or the declining-balance method using any proper percent-age of the straight-line rate;

(f) a change in the interest factor usedin connection with a compound interestmethod or sinking fund method;

(g) a change in averaging conventionas set forth in § 1.167(a)–10(b). However,as specifically provided in § 1.167(a)–10(b), in any taxable year in which anaveraging convention substantially dis-torts the depreciation allowance for thetaxable year, it may not be used (see Rev.Rul. 73–202, 1973–1 C.B. 81);

(h) a change from charging the depre-ciation reserve with costs of removal andcrediting the depreciation reserve withsalvage proceeds to deducting costs ofremoval as an expense and including sal-vage proceeds in taxable income as setforth in § 1.167(a)–8(e)(2). See Rev. Rul.74–455, 1974–2 C.B. 63. This section6.02 applies to this change, however, onlyif:

(i) the change is applied to all items inthe account for which the change is beingmade; and

(ii) the removal costs are not requiredto be capitalized under any provision ofthe Code (for example, § 263(a), 263A, or280B);

(i) a change from crediting the depre-ciation reserve with the salvage proceedsrealized on normal retirement sales tocomputing and recognizing gains andlosses on the sales (see Rev. Rul. 70–165,1970–1 C.B. 43);

(j) a change from crediting ordinaryincome (including the combinationmethod of crediting the lesser of estimatedsalvage value or actual salvage proceedsto the depreciation reserve, with any ex-cess of salvage proceeds over estimatedsalvage value credited to ordinary in-come) with the salvage proceeds realizedon normal retirement sales, to computingand recognizing gains and losses on thesales (see Rev. Rul. 70–166, 1970–1 C.B.44);

(k) a change from item accounting forspecific assets to multiple asset account-ing (pooling) for the same assets, or viceversa;

(l) a change from one type of multipleasset accounting (pooling) for specific as-sets to a different type of multiple assetaccounting (pooling) for the same assets;

(m) a change from one method de-scribed in Rev. Proc. 2000–38 for amor-tizing distributor commissions (as defined

Bulletin No. 2016–21 May 23, 2016893

by section 2 of Rev. Proc. 2000–38) toanother method described in Rev. Proc.2000–38 for amortizing distributor com-missions; or

(n) a change from pooling to a singleasset, or vice versa, for distributor com-missions (as defined by section 2 of Rev.Proc. 2000–38) for which the taxpayer isusing the distribution fee period methodor the useful life method (both describedin Rev. Proc. 2000–38).

(5) Additional requirements. A tax-payer also must comply with the follow-ing:

(a) Basis for depreciation. At the be-ginning of the year of change, the basis fordepreciation of property to which thischange applies is the adjusted basis of theproperty as provided in § 1011 at the endof the taxable year immediately precedingthe year of change (determined under tax-payer’s present method of accounting fordepreciation). If applicable under the tax-payer’s proposed method of accountingfor depreciation, this adjusted basis is re-duced by the estimated salvage value ofthe property (for example, a change to thestraight-line method).

(b) Rate of depreciation. The rate ofdepreciation for property changed to:

(i) the straight-line or the sum-of-the-years-digits method of depreciation mustbe based on the remaining useful life ofthe property as of the beginning of theyear of change; or

(ii) the declining-balance method ofdepreciation must be based on the usefullife of the property measured from theplaced-in-service date, and not the ex-pected remaining life from the date thechange becomes effective.

(c) Regulatory requirements. Forchanges in method of depreciation to thesum-of-the-years-digits or declining-balance method, the property must meetthe requirements of § 1.167(b)–0 or1.167(c)–1, as appropriate.

(d) Public utility property. If any itemof property is public utility property withinthe meaning of former § 167(l)(3)(A), thetaxpayer (including a qualified small tax-payer as defined in section 6.01(4)(b) of thisrevenue procedure) must attach to the Form3115 a statement providing that the taxpayeragrees to the following additional terms andconditions:

(i) a normalization method of account-ing within the meaning of former§ 167(l)(3)(G) will be used for the publicutility property subject to the Form 3115;and

(ii) within 30 calendar days of filing thefederal income tax return for the year ofchange, the taxpayer will provide a copyof the completed Form 3115 to any regu-latory body having jurisdiction over thepublic utility property subject to the Form3115.

(6) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015) to make this change:

(a) The identification section of page 1(above Part I);

(b) The signature section at the bottomof page 1;

(c) Part I;(d) Part II, all lines except lines 13,

15b, 16, 17, and 19;(e) Part IV, line 25; and(f) Schedule E.(7) Section 481(a) adjustment. Because

the adjusted basis of the property is notchanged as a result of a method changemade under this section 6.02, no items arebeing duplicated or omitted. Accordingly,a § 481(a) adjustment is neither requirednor permitted.


more than one asset for the same year ofchange should file a single Form 3115 forall such assets.

(b) A taxpayer making both thischange and a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for bothchanges, in which case the taxpayer mustenter the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes. For example, a qualifiedsmall taxpayer must include on the singleForm 3115 the information required bysection 6.02(6) of this revenue procedurefor this change and the information re-

quired by the lines on Form 3115 appli-cable to the UNICAP method change, in-cluding Part II line 14 and 15, Part IV, andSchedule D, and must include a separateresponse to each line on Form 3115 that isapplicable to both changes (such as Part IIlines 6b, 7, 8b, 14, and, as applicable forthis change, Part IV) for which the tax-payer’s response is different for thischange and the change to a UNICAPmethod.



.03 Sale, lease, or financingtransactions.

(1) Description of change and scope.(a) Applicability. This change applies

to a taxpayer that wants to change itsmethod of accounting from:

(i) improperly treating property as soldby the taxpayer to properly treating prop-erty as leased or financed by the taxpayer;

(ii) improperly treating property asleased by the taxpayer to properly treatingproperty as sold or financed by the tax-payer;

(iii) improperly treating property as fi-nanced by the taxpayer to properly treat-ing property as sold or leased by the tax-payer;

(iv) improperly treating property aspurchased by the taxpayer to properlytreating property as leased by the tax-payer; and

(v) improperly treating property asleased by the taxpayer to properly treatingproperty as purchased by the taxpayer.


(i) a rent-to-own dealer that wants tochange its method of accounting for rent-to-own contracts described in section 3 ofRev. Proc. 95–38, 1995–2 C.B. 397; or

(ii) a taxpayer that holds assets for saleor lease, if any asset so held is not thesubject of a sale or lease transaction as ofthe beginning of the year of change.

(2) Manner of making change.

May 23, 2016 Bulletin No. 2016–21894

(a) The change in method of account-ing under this section 6.03 is made usinga cut-off method and applies to transac-tions entered into on or after the beginningof the year of change. Accordingly, a§ 481(a) adjustment is neither requirednor permitted.

(b) If a taxpayer wants to change itsmethod of accounting for sale, lease orfinancing transactions entered into beforethe beginning of the year of change, thetaxpayer must file a Form 3115 under thenon-automatic change procedures of Rev.Proc. 2015–13, 2015–5 I.R.B. 419. Achange involving sale, lease, or financingtransactions entered into before the begin-ning of the year of change will require a§ 481(a) adjustment. The IRS will gener-ally not consider a taxpayer’s request tochange a method of accounting for a sale,lease, or financing transaction entered intobefore the beginning of the year of changeunless the taxpayer’s proposed method ofaccounting is consistent with the methodused by the counterparty to the agreement.The following information should be sub-mitted with Form 3115 to substantiate thatthe taxpayer’s proposed method is consis-tent with the counterparty’s method: (i)the name of the counterparty to the trans-action; and (ii) a representation, signedunder penalties of perjury, from the coun-terparty that provides the method of ac-counting for the agreement used by thecounterparty for federal income tax pur-poses. If a taxpayer does not submit thecounterparty information, the taxpayer’srequest to change a method of accountingfor a sale, lease, or financing transactionentered into before the beginning of theyear of change will be considered only inunusual and compelling circumstances.The requirement to obtain counterpartyinformation from multiple counterpartieswill not be considered unusual or compel-ling.

(3) No audit protection. A taxpayerdoes not receive audit protection undersection 8.01 of Rev. Proc. 2015–13 inconnection with this change. See section8.02(2) of Rev. Proc. 2015–13.


(5) Contact information. For further in-formation regarding a change under thissection, contact Edward Schwartz at (202)317-7006 (not a toll-free call).

.04 Change in general asset accounttreatment due to a change in the use ofMACRS property.

(1) Description of change. This changeapplies to a taxpayer that wants to changethe method of accounting for general assetaccount treatment of MACRS property (asdefined in § 1.168(b)–1(a)(2)) to themethod of accounting provided in§ 1.168(i)–1(c)(2)(ii)(I) or § 1.168(i)–1(h)(2), which applies when there is achange in the use of MACRS propertypursuant to § 1.168(i)–4(d).

(2) Manner of making change.(a) The change is made on a modified

cut-off basis (as defined in § 1.446–1(e)(2)(ii)(d)(5)(iii)) and, thus, the ad-justed depreciable basis of the MACRSproperty as of the beginning of the year ofchange is recovered using the proposedmethod of accounting for general assetaccount treatment. Accordingly, a§ 481(a) adjustment is neither permittednor required. See § 1.168(i)–1(h)(2)(ii)and (iii) for more information regardinghow to establish the general asset accountwhen a change in the use of MACRSproperty occurs pursuant to § 1.168(i)–4(d).

(b) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015) to make this change:

(i) The identification section of page 1(above Part I);

(ii) The signature section at the bottomof page 1;

(iii) Part I;(iv) Part II, all lines except lines 13,

15b, 16, 17, and 19;(v) Part IV, line 25; and(vi) Schedule E.(3) Concurrent automatic change. A

taxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets.

(4) Designated automatic accountingmethod change number. The designated

automatic accounting method changenumber for a change under this section6.04 is “87.”

(5) Contact information. For further in-formation regarding a change under thissection, contact Elizabeth Binder at (202)317-7005 (not a toll-free call).

.05 Change in method of accounting fordepreciation due to a change in the useof MACRS property.

(1) Description of change. This changeapplies to a taxpayer that wants to (a)change the method of accounting for de-preciation of MACRS property (as de-fined in § 1.168(b)–1(a)(2)) to the methodof accounting for depreciation provided in§ 1.168(i)–4, which applies when there isa change in the use of MACRS property,or (b) revoke the election provided in§ 1.168(i)–4(d)(3)(ii) to disregard achange in the use of MACRS property.See § 1.168(i)–4(g)(2).





15b, 16, 17, and 19;(e) Part IV, all lines except line 25; and(f) Schedule E.(3) Concurrent automatic change. A

taxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets and provide a single net § 481(a)adjustment for all the changes included inthat Form 3115. If one or more of thechanges in that single Form 3115 generatea negative § 481(a) adjustment and otherchanges in that same Form 3115 generatea positive § 481(a) adjustment, the tax-payer may provide a single negative§ 481(a) adjustment for all the changesthat are included in that Form 3115 gen-erating such adjustment and a single pos-itive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such adjustment.

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.06 Depreciation of qualified non-personal use vans and light trucks.

(1) Description of change. This changeapplies to a taxpayer that wants to changethe method of accounting for depreciationfor certain vehicles in accordance with§ 1.280F–6(f)(2)(iv). Section 1.280F–6(f)(2)(iv) applies to a truck or van that isa qualified nonpersonal use vehicle as de-fined under § 1.274–5T(k), was placed inservice by the taxpayer before July 7,2003, and was treated by the taxpayer as apassenger automobile under § 1.280F–6Tas in effect prior to July 7, 2003. If thetaxpayer files Form 3115, in accordancewith § 1.280F–6(f)(2)(iv), the treatment ofthe truck or van will be changed from prop-erty to which § 280F(a) applies to propertyto which § 280F(a) does not apply.





15b, 16, 17, and 19;(e) Part IV, all lines except line 25; and(f) Schedule E.(3) Concurrent automatic change. A

taxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets and provide a single net § 481(a)adjustment for all the changes included inthat Form 3115. If one or more of thechanges in that single Form 3115 generatea negative § 481(a) adjustment and otherchanges in that same Form 3115 generatea positive § 481(a) adjustment, the tax-payer may provide a single negative

§ 481(a) adjustment for all the changesthat are included in that Form 3115 gen-erating such adjustment and a single pos-itive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such adjustment.


(5) Contact information. For further in-formation regarding a change under thissection, contact Bernard Harvey at (202)317-7005 (not a toll-free call).

.07 Impermissible to permissible methodof accounting for depreciation oramortization for disposed depreciable oramortizable property.

(1) Description of change. This changeapplies to a taxpayer that wants to makethe change in method of accounting fordepreciation or amortization (deprecia-tion) provided under section 3 of Rev.Proc. 2007–16, 2007–1 C.B. 358, for anitem of depreciable or amortizable prop-erty that has been disposed of by the tax-payer. Section 3 of Rev. Proc. 2007–16allows a taxpayer to make a change inmethod of accounting for depreciation forthe disposed property if the taxpayer usedan impermissible method of accountingfor depreciation for the property underwhich the taxpayer did not take into ac-count any depreciation allowance, or didtake into account some depreciation butless than the depreciation allowable, in theyear of change (as defined in section6.07(4) of this revenue procedure) or anyprior taxable year.

(2) Applicability.(a) In general. Except as provided in

section 6.07(2)(b) of this revenue proce-dure, this section 6.07 applies to a tax-payer that is changing from an impermis-sible method of accounting fordepreciation to a permissible method ofaccounting for depreciation for any itemof depreciable or amortizable propertysubject to §§ 167, 168, 197, 1400I, or1400L(c), to former § 168, or to any ad-ditional first year depreciation deductionprovision of the Code (for example,§ 168(k), § 168(l), § 1400L(b), or§ 1400N(d)):

(i) that has been disposed of by thetaxpayer during the year of change (asdefined in section 6.07(4) of this revenueprocedure); and

(ii) for which the taxpayer did not takeinto account any depreciation allowance,or did take into account some depreciationbut less than the depreciation allowable(hereinafter, both are referred to as“claimed less than the depreciation allow-able”), in the year of change (as defined insection 6.07(4) of this revenue procedure)or any prior taxable year.

(b) Inapplicability. This section 6.07does not apply to:

(i) any property to which § 1016(a)(3)(regarding property held by a tax-exemptorganization) applies;

(ii) any property for which a taxpayeris revoking a timely valid depreciationelection, or making a late depreciationelection, under the Code or regulationsthereunder, or under other guidance pub-lished in the Internal Revenue Bulletin(including under § 13261(g)(2) or (3) ofthe Revenue Reconciliation Act of 1993(1993 Act), 1993–3 C.B. 1, 128 (relatingto amortizable § 197 intangibles));

(iii) any property for which the tax-payer deducted the cost or other basis ofthe property as an expense; or

(iv) any property disposed of by thetaxpayer in a transaction to which a non-recognition section of the Code applies(for example, § 1031, transactions subjectto § 168(i)(7)(B)). However, this section6.07(2)(b)(iv) does not apply to propertydisposed of by the taxpayer in a § 1031 or§ 1033 transaction if the taxpayer electsunder § 1.168(i)–6(i) and (j) to treat theentire basis (that is, both the exchangedand excess basis (as defined in § 1.168(i)–6(b)(7) and (8), respectively) of the re-placement MACRS property (as definedin § 1.168(i)–6(b)(1)) as property placedin service by the taxpayer at the time ofreplacement and treat the adjusted depre-ciable basis of the relinquished MACRSproperty (as defined in § 1.168(i)–6(b)(2))as being disposed of by the taxpayer at thetime of disposition.

(3) Manner of making the change.(a) Change made on an original return

for the year of change. This change maybe made on a taxpayer’s timely filed (in-cluding any extension) original federal taxreturn for the year of change (as defined in

May 23, 2016 Bulletin No. 2016–21896

section 6.07(4) of this revenue procedure),provided the taxpayer files the originalForm 3115 in accordance with section6.03(1)(a) of Rev. Proc. 2015–13, 2015–5I.R.B. 419.

(b) Change made on an amended re-turn for the year of change. This changemay also be made on an amended federaltax return for the year of change (as de-fined in section 6.07(4) of this revenueprocedure), provided:

(i) the taxpayer files the original Form3115 with the taxpayer’s amended federaltax return for the year of change (as de-fined in section 6.07(4) of this revenueprocedure) prior to the expiration of theperiod of limitation for assessment under§ 6501(a) for the taxable year in which theitem of depreciable or amortizable prop-erty was disposed of by the taxpayer; and

(ii) the taxpayer’s amended federal taxreturn for the year of change (as defined insection 6.07(4) of this revenue procedure)includes the adjustments to taxable in-come and any collateral adjustments totaxable income or tax liability (for exam-ple, adjustments to the amount or charac-ter of the gain or loss of the disposeddepreciable or amortizable property) re-sulting from the change in method of ac-counting for depreciation made by the tax-payer under this section 6.07.

(4) Year of change. The year of changefor this change is the taxable year inwhich the item of depreciable or amortiz-able property was disposed of by the tax-payer.

(5) Certain eligibility rules inapplica-ble. The eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply to this change.

(6) Filing requirements.(a) Notwithstanding section 6.03(1)(a)

of Rev. Proc. 2015–13, a taxpayer makingthis change in accordance with section6.07(3)(b) of this revenue procedure mustattach the original Form 3115 to the tax-payer’s timely filed amended federal taxreturn for the year of change and must filethe required copy (with signature) of theForm 3115 with the IRS in Covington,KY, no later than when the original Form3115 is filed with the amended federal taxreturn for the year of change. If a taxpayeris making this change in accordance withsection 6.07(3)(a) of this revenue proce-

dure, the filing requirements in section6.03(1)(a) of Rev. Proc. 2015–13 apply.

(b) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015) to make this change:




15b, 16, 17, and 19;(v) Part IV, all lines except line 25; and(vi) Schedule E.(7) Section 481(a) adjustment period.

A taxpayer must take the entire § 481(a)adjustment into account in computing tax-able income for the year of change.

(8) Concurrent automatic change. Ataxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets.



.08 Tenant construction allowances.


to a taxpayer that wants to change itsmethod of accounting for tenant construc-tion allowances:

(i) from improperly treating the tax-payer as having a depreciable interest inthe property subject to the tenant con-struction allowances for federal incometax purposes to properly treating the tax-payer as not having a depreciable interestin such property for federal income taxpurposes; or

(ii) from improperly treating the tax-payer as not having a depreciable interestin the property subject to the tenant con-struction allowances for federal incometax purposes to properly treating the tax-payer as having a depreciable interest in

such property for federal income tax pur-poses.


(i) any tenant construction allowancethat qualifies under § 110;

(ii) any portion of a tenant constructionallowance that is not expended on depre-ciable property; or

(iii) any amount expended for depre-ciable property in excess of the tenantconstruction allowance.

(2) Definition. For purposes of this sec-tion 6.08, the term “tenant constructionallowance(s)” means any amount receivedby a lessee from a lessor to construct,acquire, or improve property for use bythe lessee pursuant to a lease.

(3) Manner of making the change.(a) The change in method of account-

ing under this section 6.08 is made usinga cut-off method and only applies toleases entered into on or after the begin-ning of the year of change. Accordingly, a§ 481(a) adjustment is neither requirednor permitted.

(b) If a taxpayer wants to change itsmethod of accounting for tenant construc-tion allowances under existing leases, thetaxpayer must file a Form 3115 with theCommissioner in accordance with thenon-automatic change procedures of Rev.Proc. 2015–13, 2015–5 I.R.B. 419. Achange involving tenant construction al-lowances under existing leases will re-quire a § 481(a) adjustment. The Commis-sioner may grant consent to change amethod of accounting for tenant construc-tion allowances under existing leases onlyif the taxpayer’s treatment of the propertysubject to the tenant construction allow-ances is consistent with the treatment ofsuch property by the counterparty for fed-eral income tax purposes. The taxpayermust submit the following informationwith a Form 3115 submitted under thenon-automatic change procedures of Rev.Proc. 2015–13 and this section 6.08.

(i) If a lessee is filing the Form 3115,the lessee must submit with the Form3115: (A) a statement that provides theamount of the tenant construction allow-ance received by the lessee, the amount ofsuch tenant construction allowance ex-pended by the lessee on property, and thename of the lessor that provided the tenantconstruction allowance; and (B) a repre-

Bulletin No. 2016–21 May 23, 2016897

sentation, signed under penalties of per-jury, from such lessor that provides theamount of the tenant construction allow-ance provided to the lessee and an expla-nation as to how the lessor is treating theproperty subject to such tenant construc-tion allowance for federal income tax pur-poses. If the lessor capitalized the tenantconstruction allowance (or any portionthereof) provided to the lessee and depre-ciated the property subject to such tenantconstruction allowance, the representationmust also include the amount that wascapitalized by the lessor, the Internal Rev-enue Code section under which the prop-erty is depreciated by the lessor, and thelife over which the property is depreciatedby the lessor.

(ii) If a lessor is filing the Form 3115,the lessor must submit with the Form3115: (A) a statement that provides theamount of the tenant construction allow-ance provided to a lessee and the name ofthe lessee that received such tenant con-struction allowance; and (B) a representa-tion, signed under penalties of perjury,from such lessee that provides the amountof the tenant construction allowance re-ceived from the lessor, the amount of suchtenant construction allowance recognizedas gross income by the lessee, the amountof the tenant construction allowance ex-pended by the lessee on property, and anexplanation as to how the lessee is treatingthe property subject to the tenant con-struction allowance for federal income taxpurposes. If the lessee capitalized the ten-ant construction allowance (or any portionthereof) received from the lessor and de-preciated the property subject to such ten-ant construction allowance, the represen-tation must also include the amount thatwas capitalized by the lessee, the InternalRevenue Code section under which theproperty is depreciated by the lessee, andthe life over which the property is depre-ciated by the lessee.

(4) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015) to make this change in accor-dance with section 6.08(3)(a) of this rev-enue procedure:




15b, 16, 17, and 19;(e) Part IV, line 25; and(f) Schedule E.(5) No audit protection. A taxpayer

does not receive audit protection undersection 8.01 of Rev. Proc. 2015–13 inconnection with this change made in ac-cordance with section 6.08(3)(a) of thisrevenue procedure. See section 8.02(2) ofRev. Proc. 2015–13.

(6) Concurrent automatic change. Ataxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets.



.09 Safe harbor method of accountingfor determining the depreciation ofcertain tangible assets used by wirelesstelecommunications carriers under Rev.Proc. 2011–22.

(1) Description of change. This changeapplies to a taxpayer that is within thescope of Rev. Proc. 2011–22, 2011–18I.R.B. 737, and wants to change to therecovery periods described in section 5 ofRev. Proc. 2011–22 and any collateralchange to the depreciation methods for all,or some of, the assets listed in that section.




(c) Part I;

(d) Part II, all lines except lines 13,15b, 16, 17, and 19;

(e) Part IV, all lines except line 25; and(f) Schedule E.(3) Concurrent automatic change. A

taxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets and provide a single net § 481(a)adjustment for all the changes included inthat Form 3115. If one or more of thechanges in that single Form 3115 generatea negative § 481(a) adjustment and otherchanges in that same Form 3115 generatea positive § 481(a) adjustment, the tax-payer may provide a single negative§ 481(a) adjustment for all the changesthat are included in that Form 3115 gen-erating such adjustment and a single pos-itive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such adjustment.


(5) Contact information. For further in-formation regarding a change under thissection, contact Charles Magee at (202)317-7005 (not a toll-free call).

.10 Late partial disposition election(§ 168; § 1.168(i)–8).


to a taxpayer that wants to make: (i) a latepartial disposition election under§ 1.168(i)–8(d)(2)(i) for the disposition ofa portion of an asset (as determined under§ 1.168(i)–8(c)(4)) by the taxpayer; or (ii)the late partial disposition election speci-fied in § 1.168(i)–8(d)(2)(i) that is madepursuant to § 1.168(i)–8(d)(2)(iv)(B) forthe disposition of a portion of an asset bythe taxpayer. This change also may affectwhether the taxpayer must capitalizeamounts paid to restore a unit of property(as determined under § 1.263(a)–3(e) or(f)) under § 1.263(a)–3(k).

(b) Inapplicability. This change doesnot apply to the following:

(i) Any asset of which the disposedportion was a part that is not owned by thetaxpayer at the beginning of the year ofchange;

May 23, 2016 Bulletin No. 2016–21898

(ii) A taxpayer making any late elec-tion specified in section 6.10(1)(a) of thisrevenue procedure after the time specifiedin section 6.10(3) of this revenue proce-dure. Any such late election is not achange in method of accounting pursuantto § 1.446–1(e)(2)(ii)(d)(3)(iii);

(iii) The partial disposition electionspecified in § 1.168(i)–8(d)(2)(i) that ismade pursuant to § 1.168(i)–8(d)(2)(iii)(but see section 6.12 of this revenue pro-cedure for making this change);

(iv) A taxpayer within the scope re-quirements of Rev. Proc. 2015–20,2015–9 I.R.B. 694, and that calculated a§ 481(a) adjustment as of the first day ofthe taxpayer’s year of change that tookinto account only dispositions in taxableyears beginning on or after January 1,2014, for any change in method of account-ing provided in section 6.37(3)(a)(iv),(a)(v), (a)(vii), or (a)(viii), section 6.38, orsection 6.39 of Rev. Proc. 2015–14, 2015–5I.R.B. 450, as modified by Rev. Proc.2015–20 (now section 6.14(3)(a)(iv), (a)(v),(a)(vii), or (a)(viii), section 6.15, or section6.16 of this revenue procedure); or

(v) A taxpayer within the scope re-quirements of Rev. Proc. 2015–20 andthat calculated a § 481(a) adjustment as ofthe first day of the taxpayer’s year ofchange that took into account onlyamounts paid or incurred in taxable yearsbeginning on or after January 1, 2014, forany change in method of accounting pro-vided in section 10.11(3)(a) of Rev. Proc.2015–14 (now section 11.08(3) of thisrevenue procedure).

(2) Change in method of accounting.The IRS will treat the making of the lateelection specified in section 6.10(1) of thisrevenue procedure as a change in methodof accounting only for the time specifiedin section 6.10(3) of this revenue proce-dure.

(3) Time for making the change.(a) If the change under this section 6.10

is made pursuant to § 1.168(i)–8(d)(2)(i),this change must be made for any taxableyear beginning on or after January 1,2012, and beginning before January 1,2015.

(b) If the change under this section6.10 is made pursuant to § 1.168(i)–8(d)(2)(iv)(B), this change must be madefor the first or second taxable year suc-ceeding the applicable taxable year (as

defined in § 1.168(i)–8(d)(2)(iv)), pursu-ant to § 1.168(i)–8(d)(2)(iv)(B).

(4) Certain eligibility rules inapplica-ble.

(a) In general. The eligibility rules insections 5.01(1)(d) and (f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, do not applyto this change.

(b) Concurrent automatic change. If ataxpayer makes both a change under thissection 6.10 and a change under section6.01 of this revenue procedure for anytaxable year specified in section 6.10(3) ofthis revenue procedure, as applicable, on asingle Form 3115 for the same asset forthe same year of change in accordancewith section 6.10(6)(b) of this revenueprocedure, the eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply to the taxpayer for eitherchange.

(5) Manner of making change.(a) A qualified small taxpayer, as de-

fined in section 6.01(4)(b) of this revenueprocedure, is required to complete onlythe following information on Form 3115(Rev. December 2015) to make thischange:



(iii) Part I, line 1(a);(iv) Part II, all lines except lines 13,

15b, 16, 17, and 19;(v) Part IV, all lines except line 25; and(vi) Schedule E.(b) A taxpayer (including a qualified

small taxpayer) making this change must:(i) Apply § 1.168(i)–8(h)(1) and (3)

(accounting for asset disposed of);(ii) If the asset (as determined under

§ 1.168(i)–8(c)(4)) of which the disposedportion is a part is properly included inone of the asset classes 00.11 through 00.4of Rev. Proc. 87–56, 1987–2 C.B. 674,classify the replacement portion of suchasset under the same asset class as thedisposed portion of the asset in the taxableyear in which the replacement portion isplaced in service by the taxpayer;

(iii) If the taxpayer’s present method ofaccounting is not in accord with§ 1.168(i)–8(c)(4) (determination of assetdisposed of), change to the appropriateasset as determined under § 1.168(i)–8(c)(4). This change is made under this

section 6.10 instead of under section 6.15or section 6.16 of this revenue procedure,as applicable;

(iv) If the taxpayer continues to deductdepreciation for the disposed portion ofthe asset (as determined under § 1.168(i)–8(c)(4)) under the taxpayer’s presentmethod of accounting, change from depre-ciating such disposed portion to recogniz-ing gain or loss for the disposed portionor, if § 280B and § 1.280B–1 apply to thedisposition, change from depreciatingsuch disposed portion to capitalizing theloss sustained on account of the demoli-tion to the land on which the demolishedstructure was located. This change ismade under this section 6.10 instead ofunder section 6.15 or section 6.16 of thisrevenue procedure, as applicable;

(v) If the taxpayer recognized a gain orloss under § 1.168(i)–1T or § 1.168(i)–8Tfor the disposed portion of the asset in ataxable year prior to the year of change,recognize gain or loss for such disposedportion under § 1.168(i)–8. This change ismade under this section 6.10 instead ofunder section 6.15 or section 6.16 of thisrevenue procedure, as applicable; and

(vi) If any asset is public utility prop-erty within the meaning of § 168(i)(10),attach to its Form 3115 a statement pro-viding that the taxpayer agrees to the fol-lowing additional terms and conditions:

(A) A normalization method of ac-counting (within the meaning of§ 168(i)(9)) will be used for the publicutility property subject to the Form 3115;

(B) Within 30 calendar days of filingthe federal income tax return for the yearof change, the taxpayer will provide acopy of the completed Form 3115 to anyregulatory body having jurisdiction overthe public utility property subject to theForm 3115; and

(C) As of the beginning of the year ofchange, the taxpayer will adjust its de-ferred tax reserve account or similar ac-count in the taxpayer’s regulatory booksof account by the amount of the deferralof federal income tax liability associatedwith the § 481(a) adjustment applicable tothe public utility property subject to theForm 3115.


more than one asset for the same year ofchange should file a single Form 3115 for

Bulletin No. 2016–21 May 23, 2016899

all such assets. If the change for more thanone asset included in that Form 3115 isspecified in section 6.10(1) of this rev-enue procedure, the single Form 3115should provide a single net § 481(a)adjustment for all such changes. If oneor more of the changes specified in sec-tion 6.10(1) of this revenue procedure inthat single Form 3115 generate a nega-tive § 481(a) adjustment and otherchanges specified in section 6.10(1) ofthis revenue procedure in that sameForm 3115 generate a positive § 481(a)adjustment, the taxpayer may provide asingle negative § 481(a) adjustment forall such changes that are included in thatForm 3115 generating such negative ad-justment and a single positive § 481(a)adjustment for all such changes that areincluded in that Form 3115 generatingsuch positive adjustment.

(b) A taxpayer making this changeand any change listed in section6.10(6)(b)(i)–(ii) of this revenue proce-dure for the same year of change shouldfile a single Form 3115 for all suchchanges and must enter the designatedautomatic accounting method changenumbers for the changes on the appro-priate line on the Form 3115. This sec-tion 6.10(6)(b) applies only if all ofthese changes are made for any taxableyear specified in section 6.10(3) of thisrevenue procedure, as applicable (forexample, for a taxable year beginningon or after January 1, 2012, and begin-ning before January 1, 2015, if thechange under section 6.10 of this reve-nue procedure is made pursuant to§ 1.168(i)– 8(d)(2)(i)). See section6.03(1)(b) of Rev. Proc. 2015–13 forinformation on making concurrentchanges. For example, a qualified smalltaxpayer must include on the singleForm 3115 the information required tobe completed on Form 3115 by a qual-ified small taxpayer under this revenue

procedure for each change in method ofaccounting included on that Form 3115.The listed changes are:

(i) A change under section 6.01 of thisrevenue procedure; and

(ii) A change under section 6.11 of thisrevenue procedure.

(7) Examples. The following examplesillustrate the changes that may be madeunder this section 6.10.

(a) Example 1. (i) X, a fiscal year taxpayer witha taxable year beginning on December 1 and end-ing on November 30, acquired and placed in ser-vice a truck in 2009. The truck is described inasset class 00.242 of Rev. Proc. 87–56. X depre-ciates the truck under § 168. X does not reason-ably expect to replace the engine of the truck morethan once during its class life of 6 years. Theengine is a major component of the truck under§ 1.263(a)–3T(i)(1)(vi).

(ii) In December 2012, X replaced the engine ofthe truck. X applied § 1.168(i)–8T and§ 1.263(a)–3T for its taxable year ended November30, 2013. Because the truck is the asset for disposi-tion purposes, X did not recognize a loss on theretirement of the engine under § 1.168(i)–8T andcontinues to depreciate the original engine. Further,X capitalized the new engine as an improvement,classified the new engine under asset class 00.242 ofRev. Proc. 87–56, and depreciates the new engineunder § 168.

(iii) X complies with § 1.168(i)–8 beginningwith its taxable year ending November 30, 2015. Xalso decides to make the late partial dispositionelection under this section 6.10 for the truck’soriginal engine that X retired in December 2012.Although the truck is the asset for dispositionpurposes under § 1.168(i)– 8(c)(4)(ii)(C), the par-tial disposition rule under § 1.168(i)– 8(d)(2)(i)results in the retirement of the engine being adisposition under § 1.168(i)– 8(b)(2). Thus, in ac-cordance with section 6.10 of this revenue proce-dure, X may file a Form 3115 with its federalincome tax return for the taxable year endingNovember 30, 2015, to make the late dispositionelection for the engine and change from depreci-ating the original engine to recognizing a lossupon its retirement.

(b) Example 2. (i) Y, a fiscal year taxpayer witha taxable year beginning on December 1 and endingon November 30, acquired and placed in service abuilding and its structural components in 2000. Ydepreciates this building and its structural compo-nents under § 168. The roof is a structural com-ponent of the building. Y replaced the entire roof

in June 2010. On its federal income tax return forthe taxable year ended November 30, 2010, Y didnot recognize a loss on the retirement of the orig-inal roof and continued to depreciate the originalroof. Y also capitalized the cost of the replacementroof and has been depreciating this roof under§ 168 since June 2010. The adjusted depreciablebasis of the original roof at the time of the retire-ment in 2010 (taking into account the applicableconvention) is $11,000, and Y claimed deprecia-tion of $1,000 for such roof after its retirement(taking into account the applicable convention)and before the taxable year ended November 30,2013.

(ii) In accordance with § 1.168(i)–8T(c)(4)(ii)(A) and (B) and section 6.29(3)(a) and(b) of the APPENDIX to Rev. Proc. 2011–14, asmodified by Rev. Proc. 2012–20, 2012–14 I.R.B.700, Y filed with its federal income tax return for thetaxable year ended November 30, 2013, a Form 3115to treat the building as an asset and each structuralcomponent of the building as a separate asset fordisposition purposes and also to change from depre-ciating the original roof to recognizing a loss uponits retirement. The amount of the net negative§ 481(a) adjustment on this Form 3115 is $10,000(adjusted depreciable basis of $11,000 for the orig-inal roof at the time of its retirement (taking intoaccount the applicable convention) less depreciationof $1,000 claimed for such roof after its retirement(taking into account the applicable convention) andbefore the taxable year ended November 30, 2013).

(iii) Y complies with § 1.168(i)–8 beginningwith its taxable year ending November 30, 2015. Yalso decides to make the late partial disposition elec-tion under this section 6.10 for the building’s origi-nal roof that Y retired in 2010. Although the originalbuilding (including its original roof and other origi-nal structural components) is the asset for dispositionpurposes under § 1.168(i)–8(c)(4)(ii)(A), the partialdisposition rule under § 1.168(i)–8(d)(2)(i) results inthe retirement of the original roof being a dispositionunder § 1.168(i)–8(b)(2). Thus, in accordance withthis section 6.10, Y may file a Form 3115 with itsfederal income tax return for the taxable year endingNovember 30, 2015, to make a late partial disposi-tion election for the original roof, treat the originalbuilding (including its original roof and other origi-nal structural components) as an asset and the re-placement roof to the building as a separate asset fordisposition purposes, and recognize a loss upon theretirement of the original roof under § 1.168(i)–8.

(iv) The computation of the net § 481adjustment for this change is computed asfollows:

Net Loss on retirement of original roof on 2012 return under § 1.168(i)–8T $10,000

Net Loss on retirement of original roof under § 1.168(i)–8 (10,000)

Net § 481(a) adjustment for the roof $ 0

May 23, 2016 Bulletin No. 2016–21900

(8) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change to the method ofaccounting under this section 6.10 is“196.”

(9) Contact information. For further in-formation regarding a change under thissection, contact Patrick Clinton at (202)317-7005 (not a toll-free call).

.11 Revocation of a general assetaccount election (§ 168; § 1.168(i)–1,§ 1.168(i)–1T and Prop. Reg.§ 1.168(i)–1).

(1) Description of change.(a) Applicability. This change, as de-

scribed in Rev. Proc. 2014–54, 2014–41I.R.B. 675, applies to a taxpayer thatwants to revoke its general asset accountelection:

(i) Made under section 6.32(1)(a)(i) ofRev. Proc. 2015–14 or section6.32(1)(a)(i) of the APPENDIX to Rev.Proc. 2011–14 for one or more items ofproperty depreciated under § 168(MACRS property) included in the gen-eral asset account. This change also mayaffect whether the taxpayer must capital-ize amounts paid to restore a unit of prop-erty (as determined under § 1.263(a)–3(e)or (f)) under § 1.263(a)–3(k); or

(ii) Made under § 1.168(i)–1,§ 1.168(i)–1T, or Prop. Reg. § 1.168(i)–1for one or more items of MACRS prop-erty placed in service by the taxpayer in ataxable year beginning on or after January1, 2012, and beginning before January 1,2014. This change also may affectwhether the taxpayer must capitalizeamounts paid to restore a unit of property(as determined under § 1.263(a)–3(e) or(f)) under § 1.263(a)–3(k).

(b) Inapplicability. Because of thechanges made to the general asset accounttemporary regulations (§ 1.168(i)–1T) by§ 1.168(i)–1, the IRS will treat the revo-cation of the elections specified in section6.11(1)(a) of this revenue procedure as achange in method of accounting only forthe time specified in section 6.11(2) of thisrevenue procedure. Accordingly, thistreatment does not apply to a taxpayer thatmakes any revocation specified in section6.11(1)(a) of this revenue procedure be-fore or after the time specified in section6.11(2) of this revenue procedure. Any

such revocation is not a change in methodof accounting pursuant to § 1.446–1(e)(2)(ii)(d)(3)(iii). The elections speci-fied in section 6.11(1)(a) of this revenueprocedure are irrevocable except as pro-vided in § 1.168(i)–1(c)(1)(ii)(A), (e)(3),(g), or (h).

(2) Time for making the change. Thechange under this section 6.11 must bemade for any taxable year beginning on orafter January 1, 2012, and beginning be-fore January 1, 2015.


(a) In general. The eligibility rules insections 5.01(1)(d) and (f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, do not applyto this change.

(b) Concurrent automatic change. If ataxpayer makes both a change under thissection 6.11 and a change under section6.01 of this revenue procedure for anytaxable year beginning on or after January1, 2012, and beginning before January 1,2015, on a single Form 3115 for the sameasset for the same year of change in ac-cordance with section 6.11(6)(b) of thisrevenue procedure, the eligibility rules insections 5.01(1)(d) and (f) of Rev. Proc.2015–13 do not apply to the taxpayer foreither change.

(4) Section 481(a) adjustment period.A taxpayer making this change must takethe entire § 481(a) adjustment into ac-count in computing taxable income for theyear of change.





(iii) Part I, line 1(a);(iv) Part II, all lines except lines 13,

15b, 16, 17, and 19;(v) Part IV, all lines except line 25;

and(vi) Schedule E.(b) A taxpayer (including a qualified

small taxpayer) making this change must:(i) Attach to its Form 3115 a statement

with a description of the asset(s) to which

this change applies (for example, all gen-eral asset accounts established pursuant toa Form 3115 filed under section6.32(1)(a)(i) of the APPENDIX to Rev.Proc. 2011–14 for the year of change be-ginning January 1, 2012 (for a changespecified in section 6.11(1)(a)(i) of thisrevenue procedure); one desk costing$2,000 in 2012 General Asset Account #1(for a change specified in section6.11(1)(a)(ii) of this revenue procedure));

(ii) Include the asset(s) that were in thegeneral asset account(s) at the end of thetaxable year immediately preceding theyear of change in a single asset account ora multiple asset account in accordancewith § 1.168(i)–7. The single asset ac-count or the multiple asset account mustinclude a beginning balance for both theunadjusted depreciable basis and the de-preciation reserve. For a single asset ac-count, the beginning balance for the un-adjusted depreciable basis of that singleasset account is equal to the unadjusteddepreciable basis as of the beginning ofthe year of change for the asset includedin that single asset account and the begin-ning balance of the depreciation reserve ofthat single asset account is the greater ofthe depreciation allowed or allowable asof the beginning of the year of change forthe asset included in that single asset ac-count. For a multiple asset account, thebeginning balance for the unadjusted de-preciable basis of that multiple asset ac-count is equal to the sum of the unadjusteddepreciable bases as of the beginning ofthe year of change for all assets includedin that multiple asset account and the be-ginning balance of the depreciation re-serve of that multiple asset account isequal to the sum of the greater of thedepreciation allowed or allowable as ofthe beginning of the year of change for allassets included in that multiple asset ac-count; and

(iii) If any asset is public utility prop-erty within the meaning of § 168(i)(10),attach to its Form 3115 a statement pro-viding that the taxpayer agrees to the fol-lowing additional terms and conditions:


(B) Within 30 calendar days of filingthe federal income tax return for the year

Bulletin No. 2016–21 May 23, 2016901

of change, the taxpayer will provide acopy of the completed Form 3115 to anyregulatory body having jurisdiction overthe public utility property subject to theForm 3115; and



more than one asset for the same year ofchange should file a single Form 3115 forall such assets. If the change for more thanone asset included in that Form 3115 isspecified in section 6.11(1)(a) of this rev-enue procedure, the single Form 3115must provide a single net § 481(a) adjust-ment for all such changes.

(b) A taxpayer making this change andany change listed in section 6.11(6)(b)(i)–(iv) of this revenue procedure for the sameyear of change should file a single Form3115 for all such changes and must enterthe designated automatic accountingmethod change numbers for the changeson the appropriate line on the Form 3115.This section 6.11(6)(b) applies only if allof these changes are made for any taxableyear beginning on or after January 1,2012, and beginning before January 1,2015. See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes. For example, a qualified

small taxpayer must include on the singleForm 3115 the information required to becompleted on Form 3115 by a qualifiedsmall taxpayer under this revenue proce-dure for each change in method of ac-counting included on that Form 3115. Thelisted changes are:

(i) A change under section 6.01 of thisrevenue procedure;

(ii) A change under section 6.10 of thisrevenue procedure made pursuant to§ 1.168(i)–8(d)(2)(i);

(iii) A change under section 6.15 ofthis revenue procedure; and

(iv) A change under section 6.16 of thisrevenue procedure.

(7) Examples. The following examplesillustrate the changes that may be madeunder this section 6.11.

(a) Example 1. (i) On its federal tax return for thetaxable year ended November 30, 2013 (2012 tax-able year), X made a general asset account electionunder § 1.168(i)–1T to apply § 1.168(i)–1T to all ofits assets placed in service during the 2012 taxableyear. No such assets were disposed of during the2012 taxable year. X complies with §§ 1.168(i)–1and 1.168(i)–8 for its taxable year ending November30, 2015. Because of the change in the definition ofa qualifying disposition under § 1.168(i)–1(e)(3)(iii),X does not want its assets placed in service duringthe 2012 taxable year in general asset accounts. Inaccordance with this section 6.11, X files with itsfederal tax return for the taxable year ending November30, 2015, a Form 3115 to revoke the general assetaccount election for all assets placed in service duringthe 2012 taxable year and include such assets in onemultiple asset account in accordance with § 1.168(i)–7.Because the adjusted depreciable basis of the assets isnot changed as a result of this change, a § 481(a)adjustment is neither required nor permitted.

(b) Example 2. (i) Y, a fiscal year taxpayer witha taxable year beginning December 1 and endingNovember 30, acquired and placed in service threeused trucks in May 2012. The trucks are described in

asset class 00.242 of Rev. Proc. 87–56, 1987–2 C.B.674. Of the three trucks, one truck costs $20,000 andthe other two trucks cost a total of $30,000. Ydepreciates the trucks under § 168. In June 2013, Ysold the truck that cost $20,000 to an unrelated party for$12,000. The adjusted depreciable basis of the truck atthe time of its disposition (taking into account theapplicable convention) is $12,800 (cost of $20,000 lessdepreciation of $7,200 for the taxable years endedNovember 30, 2012, and November 30, 2013).

(ii) In accordance with § 1.168(i)–1T and section6.32(1)(a)(i) of the APPENDIX to Rev. Proc. 2011–14, as modified by Rev. Proc. 2012–20, 2012–14I.R.B. 700, Y filed with its federal tax return for thetaxable year ended November 30, 2013 (2012 tax-able year), a Form 3115 to make a late general assetaccount election to include the three trucks in onegeneral asset account. Because a sales transaction isa qualifying disposition under § 1.168(i)–1T(e)(3)(iii)(B), Y also elected to apply § 1.168(i)–1T(e)(3)(iii) for the sale of the truck in the 2012taxable year. As a result, Y removed this truck fromthe general asset account and, on its federal taxreturn for the taxable year ended November 30,2013, recognized a loss of $800 under § 1.168(i)–8T(sales proceeds of $12,000 less the adjusted depre-ciable basis of $12,800 for the truck.)

(iii) Y complies with §§ 1.168(i)–1 and1.168(i)–8 beginning with its taxable year endingNovember 30, 2015. Because a sales transaction isnot a qualifying disposition under § 1.168(i)–1(e)(3)(iii)(B), Y should have recognized all of thesales proceeds of $12,000 from the sale of the truckin the 2012 taxable year as ordinary income andcontinued to deduct depreciation for this truck in thegeneral asset account. As a result and in accordancewith sections 6.11 and 6.16(3)(i) of this revenueprocedure, Y files with its federal tax return for thetaxable year ending November 30, 2015, a Form3115 to revoke the general asset account election forthe three trucks placed in service in May 2012,include the two unsold trucks in one multiple assetaccount in accordance with § 1.168(i)–7, and recog-nize the loss of $800 upon the sale of the truck in the2012 taxable year under § 1.168(i)–8.

(iv) The computation of the § 481 adjustment forthis change is computed as follows:

Loss on sale of truck on 2012 return under § 1.168(i)–8T $ 800

Loss on sale of truck under § 1.168(i)–8 (800)

Net § 481(a) adjustment for the asset $ 0

(c) Example 3. (i) Z, a fiscal year taxpayer witha taxable year beginning December 1 and endingNovember 30, acquired and placed in service abuilding and its structural components in 2000. Zdepreciates this building and its structural compo-nents under § 168. The roof is a structural compo-nent of the building. Z replaced the entire roof inJune 2010. On its federal tax return for the taxableyear ended November 30, 2010, Z did not recognizea loss on the retirement of the original roof andcontinued to depreciate the original roof. Z also

capitalized the cost of the replacement roof and hasbeen depreciating this roof under § 168 since June2010. The adjusted depreciable basis of the originalroof at the time of its retirement in 2010 (taking intoaccount the applicable convention) is $11,000, and Zclaimed depreciation of $1,000 for such roof after itsretirement (taking into account the applicable con-vention) and before the taxable year ended Novem-ber 30, 2013 (2012 taxable year). Also, the 12-monthallowable depreciation deduction for the originalroof is $500 for the 2012 taxable year and $500 for

the taxable year ended November 30, 2014 (2013taxable year).

(ii) In accordance with § 1.168(i)–1T and section6.32(1)(a) of the APPENDIX to Rev. Proc. 2011–14,as modified by Rev. Proc. 2012–20, 2012–14 I.R.B.700, Z filed with its federal tax return for the taxableyear ended November 30, 2013, a Form 3115 to: (1)make a late general asset account election to includethe building (including its structural components)placed in service in 2000 in one general asset ac-count and the replacement roof in a separate general

May 23, 2016 Bulletin No. 2016–21902

asset account; and (2) make a late qualifying dispo-sition election for the retirement of the original roofin 2010. As a result, Z removed the original rooffrom the general asset account and reported a netnegative § 481(a) adjustment on this Form 3115 of$10,000 (adjusted depreciable basis of $11,000 forthe original roof at the time of its retirement (takinginto account the applicable convention) less depre-ciation of $1,000 claimed for such roof after itsretirement (taking into account the applicable con-vention) and before the 2012 taxable year).

(iii) Z complies with §§ 1.168(i)–1 and1.168(i)–8 for its taxable year ending November 30,2015 (2014 taxable year), but decides not to makeany late partial disposition election under section6.10 of this revenue procedure. In accordance withsections 6.11 and 6.15(3)(a) of this revenue proce-dure, Z files a Form 3115 with its federal income taxreturn for the 2014 taxable year to revoke the generalasset account election for the building (including itsstructural components) placed in service in 2000 andfor the replacement roof, and to change to treatingthe building (including its original roof and otheroriginal structural components) placed in service in2000 as an asset and the replacement roof as aseparate asset for disposition purposes. The net pos-itive § 481(a) adjustment for this change is $9,000(net loss of $10,000 claimed on the 2012 return forthe retirement of the original roof less depreciationof $1,000 for the original roof for the 2012 and 2013taxable years) and is included in Z’s taxable incomefor the 2014 taxable year.



.12 Partial dispositions of tangibledepreciable assets to which the IRS’sadjustment pertains (§ 168; § 1.168(i)–8).


to a taxpayer that is described in§ 1.168(i)–8(d)(2)(iii) and, pursuant to§ 1.168(i)–8(d)(2)(iii), that wants to makethe partial disposition election specified in§ 1.168(i)–8(d)(2)(i) to the disposition ofa portion of an asset to which the IRS’sadjustment (as described in § 1.168(i)–8(d)(2)(iii)) pertains.


(i) Any asset of which the disposedportion was a part that is not owned by the

taxpayer at the beginning of the year ofchange; or

(ii) The partial disposition electionspecified in § 1.168(i)–8(d)(2)(i) that ismade pursuant to § 1.168(i)–8(d)(2)(iv)(but see section 6.10 of this revenue pro-cedure for making this change).

(2) Change in method of accounting.The IRS will treat the making of the lateelection specified in section 6.12(1) of thisrevenue procedure as a change in methodof accounting.

(3) Certain eligibility rules inapplica-ble. The eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, do not apply to thischange.






15b, 16, 17, and 19;(v) Part IV, all lines except line 25; and(vi) Schedule E.(b) A taxpayer (including a qualified

small taxpayer) making this change must:(i) Apply § 1.168(i)–8(h)(1) and (3)

(accounting for asset disposed of);(ii) If the asset (as determined under

§ 1.168(i)–8(c)(4)) of which the disposedportion is a part is properly included inone of the asset classes 00.11 through 00.4of Rev. Proc. 87–56, 1987–2 C.B. 674,classify the replacement portion of suchasset under the same asset class as thedisposed portion of the asset in the taxableyear in which the replacement portion isplaced in service by the taxpayer;

(iii) If the taxpayer’s present method ofaccounting is not in accord with§ 1.168(i)–8(c)(4) (determination of assetdisposed of), change to the appropriateasset as determined under § 1.168(i)–8(c)(4);

(iv) If the taxpayer continues to deductdepreciation for the disposed portion ofthe asset (as determined under § 1.168(i)–8(c)(4)) under the taxpayer’s present

method of accounting, change from depre-ciating such disposed portion to recogniz-ing gain or loss for the disposed portionor, if § 280B and § 1.280B–1 apply to thedisposition, change from depreciatingsuch disposed portion to capitalizing theloss sustained on account of the demoli-tion to the land on which the demolishedstructure was located; and

(v) If any asset is public utility propertywithin the meaning of § 168(i)(10), attacha statement to its Form 3115 providingthat the taxpayer agrees to the followingadditional terms and conditions:


(B) Within 30 calendar days of filingthe federal income tax return for the yearof change, the taxpayer will provide acopy of the completed Form 3115 to anyregulatory body having jurisdiction overthe public utility property subject to theForm 3115; and


(5) Concurrent automatic change. Ataxpayer making this change for morethan one asset for the same year of changeshould file a single Form 3115 for all suchassets. If the change for more than oneasset included in that Form 3115 is spec-ified in section 6.12(1) of this revenueprocedure, the single Form 3115 shouldprovide a single net § 481(a) adjustmentfor all such changes. If one or more of thechanges specified in section 6.12(1) of thisrevenue procedure in that single Form3115 generate a negative § 481(a) adjust-ment and other changes specified in sec-tion 6.12(1) of this revenue procedure inthat same Form 3115 generate a positive§ 481(a) adjustment, the taxpayer mayprovide a single negative § 481(a) adjust-ment for all such changes that are in-cluded in that Form 3115 generating suchnegative adjustment and a single positive§ 481(a) adjustment for all such changes

Bulletin No. 2016–21 May 23, 2016903

that are included in that Form 3115 gen-erating such positive adjustment.



.13 Depreciation of leaseholdimprovements (§§ 167, 168, and 197;§ 1.167(a)–4).

(1) Description of change. Thischange, as described in Rev. Proc. 2014–17, 2014–12 I.R.B. 661, applies to a tax-payer that wants to change its method ofaccounting to comply with § 1.167(a)–4for leasehold improvements in which thetaxpayer has a depreciable interest at thebeginning of the year of change:

(a) From improperly depreciating theleasehold improvements to which § 168applies over the term of the lease (includ-ing renewals, if applicable) to properlydepreciating these improvements under§ 168;

(b) From improperly amortizing lease-hold improvements to which § 197 appliesover the term of the lease (including re-newals, if applicable) to properly amortiz-ing these improvements under § 197; or

(c) From improperly amortizing lease-hold improvements to which § 167(f)(1)applies over the term of the lease (includ-ing renewals, if applicable) to properlyamortizing these improvements under§ 167(f)(1).


(a) In general. The eligibility rule insection 5.01(1)(d) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to ataxpayer making this change.

(b) Special rule. The eligibility rule insection 5.01(1)(f) of Rev. Proc. 2015–13does not apply to a taxpayer making thischange for any taxable year beginning onor after January 1, 2012, and beginningbefore January 1, 2016.


fined in section 6.01(4)(b) of this revenueprocedure, is required to complete only

the following information on Form 3115(Rev. December 2015) to make thischange:




15b, 16, 17, and 19;(v) Part IV, all lines except line 25; and(vi) Schedule E.(b) If any leasehold improvement is

public utility property within the meaningof § 168(i)(10) or former § 167(l)(3)(A), ataxpayer (including a qualified small tax-payer) making this change must attach toits Form 3115 a statement providing thatthe taxpayer agrees to the following addi-tional terms and conditions:

(i) A normalization method of account-ing (within the meaning of § 168(i)(9) orformer § 167(l)(3)(G)) will be used for thepublic utility property subject to thechange;

(ii) As of the beginning of the year ofchange, the taxpayer will adjust its de-ferred tax reserve account or similar ac-count in the taxpayer’s regulatory booksof account by the amount of the deferralof federal income tax liability associatedwith the § 481(a) adjustment applicable tothe public utility property subject to thechange; and

(iii) Within 30 calendar days of filingthe federal income tax return for the yearof change, the taxpayer will provide acopy of the completed Form 3115 to anyregulatory body having jurisdiction overthe public utility property subject to thechange.


more than one asset for the same year ofchange should file a single Form 3115 forall such assets and provide a single net§ 481(a) adjustment for all the changesincluded in that Form 3115. If one or moreof the changes in that single Form 3115generate a negative § 481(a) adjustmentand other changes in that same Form 3115generate a positive § 481(a) adjustment,the taxpayer may provide a single nega-tive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such adjustment and asingle positive § 481(a) adjustment for all

the changes that are included in that Form3115 generating such adjustment.

(b) A taxpayer making both thischange and a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for all suchchanges and must enter the designatedautomatic accounting method changenumbers for the changes on the appropri-ate line on the Form 3115. See section6.03(1)(b) of Rev. Proc. 2015–13 for in-formation on making concurrent changes.For example, a qualified small taxpayermust include on the single Form 3115 theinformation required by section 6.13(3)(a)of this revenue procedure for this changeand the information required by the lineson Form 3115 applicable to the UNICAPmethod change, including Part II line 14and 15, Part IV, and Schedule D, and mustinclude a separate response to each line onForm 3115 that is applicable to bothchanges (such as Part II lines 6b, 7, 8b, 14,and, as applicable for this change, Part IV)for which the taxpayer’s response is dif-ferent for this change and the change to aUNICAP method.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change to a method of ac-counting under this section 6.13 is “199.”


.14 Permissible to permissible method ofaccounting for depreciation of MACRSproperty (§ 168; §§ 1.168(i)–1,1.168(i)–7, and 1.168(i)–8).


scribed in Rev. Proc. 2014–54, 2014–41I.R.B. 675, applies to a taxpayer thatwants to make a change in method ofaccounting for depreciation that is speci-fied in section 6.14(3) of this revenue pro-cedure for an asset:

(i) to which § 168 applies (MACRSproperty);

(ii) for which the present and proposedmethods of accounting are permissiblemethods of accounting under § 1.168(i)–1,

May 23, 2016 Bulletin No. 2016–21904

§ 1.168(i)–7, or § 1.168(i)–8, as applicable;and

(iii) that is owned by the taxpayer at thebeginning of the year of change.

(b) Inapplicability. This change doesnot apply to any property that is not de-preciated under § 168 under the taxpay-er’s present and proposed methods of ac-counting.

(2) Certain eligibility rules inapplicable.(a) In general. The eligibility rule in

section 5.01(1)(d) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to ataxpayer making this change.

(b) Special rule.(i) The eligibility rule in section

5.01(1)(f) of Rev. Proc. 2015–13 does notapply to a taxpayer making this change forany taxable year beginning on or afterJanuary 1, 2012, and beginning beforeJanuary 1, 2016.

(ii) If a taxpayer makes both a changeunder this section 6.14 and a change undersection 6.01 of this revenue procedure forany taxable year beginning on or afterJanuary 1, 2012, and beginning beforeJanuary 1, 2016, on a single Form 3115for the same asset for the same year ofchange in accordance with section6.14(6)(b) of this revenue procedure, theeligibility rules in sections 5.01(1)(d) and(f) of Rev. Proc. 2015–13 do not apply tothe taxpayer for either change.

(3) Changes covered. This section 6.14only applies to the following changes inmethods of accounting for depreciation ofMACRS property: (a) For the items ofMACRS property not subject to a generalasset account election under § 168(i)(4)and the regulations thereunder—

(i) a change from single asset accounts(or item accounts) for specific items ofMACRS property to multiple asset ac-counts (or pools) for the same assets, or viceversa, in accordance with § 1.168(i)–7;

(ii) a change from grouping specificitems of MACRS property in multiple as-set accounts to a different grouping of thesame assets in multiple asset accounts inaccordance with § 1.168(i)–7(c);

(iii) a change in the method of identify-ing which assets in multiple asset accountsor which portions of assets have been dis-posed of by the taxpayer from the specificidentification method under § 1.168(i)–8(g)(1) to the first-in, first-out (FIFO)method of accounting under § 1.168(i)–

8(g)(2)(i) or the modified FIFO method ofaccounting under § 1.168(i)–8(g)(2)(ii);

(iv) a change in the method of identi-fying which assets in multiple asset ac-counts or which portions of assets havebeen disposed of by the taxpayer from theFIFO method of accounting under§ 1.168(i)–8(g)(2)(i) or the modifiedFIFO method of accounting under§ 1.168(i)–(g)(2)(ii) to the specific identi-fication method under § 1.168(i)–8(g)(1);

(v) a change in the method of identify-ing which assets in multiple asset ac-counts or which portions of assets havebeen disposed of by the taxpayer from theFIFO method of accounting under§ 1.168(i)–8(g)(2)(i) to the modifiedFIFO method of accounting under§ 1.168(i)–8(g)(2)(ii), or vice versa;

(vi) a change in the method of identi-fying which mass assets (as defined in§ 1.168(i)–8(b)(3)) in multiple asset ac-counts or which portions of mass assetshave been disposed of by the taxpayerfrom the specific identification methodunder § 1.168(i)–8(g)(1) to a mortalitydispersion table in accordance with§ 1.168(i)–8(g)(2)(iii);

(vii) a change in the method of identi-fying which mass assets (as defined in§ 1.168(i)–8(b)(3)) in multiple asset ac-counts or which portions of mass assetshave been disposed of by the taxpayerfrom the FIFO method of accounting un-der § 1.168(i)–8(g)(2)(i) or the modifiedFIFO method of accounting under§ 1.168(i)–8(g)(2)(ii) to a mortality dis-persion table in accordance with§ 1.168(i)–8(g)(2)(iii);

(viii) a change in the method of iden-tifying which mass assets (as defined in§ 1.168(i)–8(b)(3)) in multiple asset ac-counts or which portions of mass assetshave been disposed of by the taxpayerfrom a mortality dispersion table in accor-dance with § 1.168(i)–8(g)(2)(iii) to thespecific identification method under§ 1.168(i)–8(g)(1), the FIFO method ofaccounting under § 1.168(i)–8(g)(2)(i), orthe modified FIFO method of accountingunder § 1.168(i)–8(g)(2)(ii);

(ix) if § 1.168(i)–8(f)(2) applies (dis-position of an asset in a multiple assetaccount) and it is impracticable from thetaxpayer’s records to determine the unad-justed depreciable basis of the asset dis-posed of, a change in the method of de-

termining the unadjusted depreciablebasis of all assets in the same multipleasset account from one reasonable methodto another reasonable method; or

(x) if § 1.168(i)–8(f)(3) applies (dispo-sition of a portion of an asset) and it isimpracticable from the taxpayer’s recordsto determine the unadjusted depreciablebasis of the disposed portion of the asset,a change in the method of determining theunadjusted depreciable basis of all dis-posed portions of the asset from one rea-sonable method to another reasonablemethod; and

(b) For the items of MACRS propertysubject to a general asset account electionunder § 168(i)(4) and the regulationsthereunder—

(i) a change from grouping specificitems of MACRS property in general assetaccounts to a different grouping of thesame assets in general asset accounts inaccordance with § 1.168(i)–1(c);

(ii) a change in the method of identi-fying which assets or which portions ofassets have been disposed of by the tax-payer from the specific identificationmethod under § 1.168(i)–1(j)(2)(i)(A) tothe FIFO method of accounting under§ 1.168(i)–1(j)(2)(i)(B) or the modifiedFIFO method of accounting under§ 1.168(i)–1(j)(2)(i)(C);

(iii) a change in the method of identi-fying which assets or which portions ofassets have been disposed of by the tax-payer from the FIFO method of account-ing under § 1.168(i)–1(j)(2)(i)(B) or themodified FIFO method of accounting un-der § 1.168(i)–1(j)(2)(i)(C) to the specificidentification method under § 1.168(i)–1(j)(2)(i)(A);

(iv) a change in the method of identi-fying which assets or which portions ofassets have been disposed of by the tax-payer from the FIFO method of account-ing under § 1.168(i)–1(j)(2)(i)(B) to themodified FIFO method of accounting un-der § 1.168(i)–1(j)(2)(i)(C), or vice versa;

(v) a change in the method of identify-ing which mass assets (as defined in§ 1.168(i)–1(b)(6)) or which portions ofmass assets that are in a separate generalasset account in accordance with § 1.168–1(c)(2)(ii)(H), have been disposed of bythe taxpayer from the specific identifica-tion method under § 1.168(i)–1(j)(2)(i)(A)

Bulletin No. 2016–21 May 23, 2016905

to a mortality dispersion table in accor-dance with § 1.168(i)–1(j)(2)(i)(D);

(vi) a change in the method of identi-fying which mass assets (as defined in§ 1.168(i)–1(b)(6)) or which portions ofmass assets that are in a separate generalasset account in accordance with § 1.168–1(c)(2)(ii)(H), have been disposed of bythe taxpayer from the FIFO method ofaccounting under § 1.168(i)–1(j)(2)(i)(B)or the modified FIFO method of account-ing under § 1.168(i)–1(j)(2)(i)(C) to amortality dispersion table in accordancewith § 1.168(i)–1(j)(2)(i)(D);

(vii) a change in the method of identi-fying which mass assets (as defined in§ 1.168(i)–1(b)(6)), or which portions ofmass assets that are in a separate generalasset account in accordance with § 1.168–1(c)(2)(ii)(H), have been disposed of bythe taxpayer from a mortality dispersiontable in accordance with § 1.168(i)–1(j)(2)(i)(D) to the specific identificationmethod under § 1.168(i)–1(j)(2)(i)(A), theFIFO method of accounting under§ 1.168(i)–1(j)(2)(i)(B), or the modifiedFIFO method of accounting under§ 1.168(i)–1(j)(2)(i)(C); or

(viii) if § 1.168(i)–1(j)(3) applies (basisof a disposed asset or a disposed portionof an asset in a general asset account) andit is impracticable from the taxpayer’s re-cords to determine the unadjusted depre-ciable basis of the disposed asset or thedisposed portion of the asset, a change inthe method of determining the unadjusteddepreciable basis of all assets in the samegeneral asset account from one reasonablemethod to another reasonable method.

(4) Manner of making change.(a) The changes in methods of account-

ing specified in section 6.14(3)(a)(i) and(ii) and section 6.14(3)(b)(i) of this reve-nue procedure are made using a modifiedcut-off method under which the unad-justed depreciable basis and the deprecia-tion reserve of the asset as of the begin-ning of the year of change are accountedfor using the proposed method of account-ing.

(i) If the change specified in section6.14(3)(a)(i) of this revenue procedure is achange to a single asset account, the newsingle asset account must include a begin-ning balance for both the unadjusted de-preciable basis and the depreciation re-

serve of the asset included in that singleasset account.

(ii) If the change specified in section6.14(3)(a)(i) or (ii) of this revenue proce-dure is a change to a multiple asset ac-count (either a new one or a differentgrouping), the multiple asset account mustinclude a beginning balance for both theunadjusted depreciable basis and the de-preciation reserve. The beginning balancefor the unadjusted depreciable basis ofeach multiple asset account is equal to thesum of the unadjusted depreciable basesas of the beginning of the year of changefor all assets included in that multipleasset account. The beginning balance ofthe depreciation reserve of each multipleasset account is equal to the sum of thegreater of the depreciation allowed or al-lowable as of the beginning of the year ofchange for all assets included in that mul-tiple asset account.

(iii) The change specified in section6.14(3)(b)(i) of this revenue procedure re-quires the general asset account to includea beginning balance for both the unad-justed depreciable basis and the deprecia-tion reserve. The beginning balance forthe unadjusted depreciable basis of eachgeneral asset account is equal to the sumof the unadjusted depreciable bases as ofthe beginning of the year of change for allassets included in that general asset ac-count. The beginning balance of the de-preciation reserve of each general assetaccount is equal to the sum of the greaterof the depreciation allowed or allowableas of the beginning of the year of changefor all assets included in that general assetaccount.

(b) The changes in methods of account-ing specified in section 6.14(3)(a)(iii), (vi),(ix), and (x) and section 6.14(3)(b)(ii), (v),and (viii) of this revenue procedure aremade using a cut-off method and apply todispositions occurring on or after the begin-ning of the year of change.

(c) Even though the changes in meth-ods of accounting specified in section6.14(3)(a)(iv), (v), (vii), and (viii) andsection 6.14(3)(b)(iii), (iv), (vi), and (vii)of this revenue procedure are changesfrom one permissible method of account-ing to another permissible method of ac-counting, these changes are made with a§ 481(a) adjustment. However, see section6.14(4)(f) of this revenue procedure for an

exception. For the changes in methods of ac-counting specified in section 6.14(3)(b)(iii),(iv), (vi), and (vii) of this revenue procedure,the § 481(a) adjustment should be zero unless§ 1.168(i)–1(e)(3) applies to the asset subjectto the change.

(d) A qualified small taxpayer, as de-fined in section 6.01(4)(b) of this revenueprocedure, is required to complete onlythe following information on Form 3115(Rev. December 2015) to make thischange:




15b, 16, 17, and 19 if the qualified smalltaxpayer is not making a change inmethod of accounting specified in section6.14(3)(a)(ix) and (x) and section6.14(3)(b)(viii) of this revenue procedure;

(v) Part II, all lines except lines 13, 15b,16c, 17, and 19 if the qualified small taxpayeris making a change in method of accountingspecified in section 6.14(3)(a)(ix) or (x) orsection 6.14(3)(b)(viii) of this revenue proce-dure;

(vi) Part IV; and(vii) Schedule E.(e) If any asset subject to this change is

public utility property within the meaningof § 168(i)(10), a taxpayer (including aqualified small taxpayer) making thischange must attach to its Form 3115 astatement providing that the taxpayeragrees to the following additional termsand conditions:

(i) A normalization method of account-ing (within the meaning of § 168(i)(9))will be used for the public utility propertysubject to the change;

(ii) As of the beginning of the year ofchange, the taxpayer will adjust its de-ferred tax reserve account or similar ac-count in the taxpayer’s regulatory booksof account by the amount of the deferralof federal income tax liability associatedwith the § 481(a) adjustment applicable toa change in method of accounting speci-fied in section 6.14(3)(a)(iv), (v), (vii), or(viii) or section 6.14(3)(b)(iii), (iv), (vi),or (vii) of this revenue procedure made forthe public utility property subject to thechange; and

May 23, 2016 Bulletin No. 2016–21906

(iii) Within 30 calendar days of filingthe federal income tax return for the yearof change, the taxpayer will provide acopy of the completed Form 3115 to anyregulatory body having jurisdiction overthe public utility property subject to thechange.

(f) A taxpayer that met the scope re-quirements of section 4 of Rev. Proc.2015–20, 2015–9 I.R.B. 694, and thatchanged its method of accounting undersection 6.37(3)(a)(iv), (a)(v), (a)(vii), or(a)(viii) of Rev. Proc. 2015–14 (which isnow section 6.14(3)(a)(iv), (a)(v), (a)(vii),or (a)(viii) of this revenue procedure) byfollowing section 5 of Rev. Proc. 2015–20is required to calculate a § 481(a) adjust-ment as of the first day of the year ofchange that takes into account only dispo-sitions in taxable years beginning on orafter January 1, 2014.

(5) No audit protection. A taxpayercalculating a § 481(a) adjustment undersection 6.14(4)(f) of this revenue proce-dure that takes into account only disposi-tions in taxable years beginning on orafter January 1, 2014, does not receiveaudit protection under section 8.01 of Rev.Proc. 2015–13 for dispositions subject to achange under section 6.14(3)(a)(iv), (a)(v),(a)(vii), or (a)(viii) of this revenue proce-dure in taxable years beginning beforeJanuary 1, 2014. See section 5.03 ofRev. Proc. 2015–20.

(6) Concurrent change.(a) A taxpayer making this change for

more than one asset for the same year ofchange should file a single Form 3115 forall such assets. If the change for more thanone asset included in that Form 3115 isspecified in section 6.14(3)(a)(iv), (v),(vii), or (viii) or section 6.14(3)(b)(iii),(iv), (vi), or (vii) of this revenue proce-dure, the single Form 3115 also shouldprovide a single net § 481(a) adjustmentfor all such changes. If one or more changesspecified in section 6.14(3)(a)(iv), (v), (vii),or (viii) or section 6.14(3)(b)(iii), (iv), (vi),or (vii) of this revenue procedure in thatsingle Form 3115 generate a negative§ 481(a) adjustment and other changes spec-ified in section 6.14(3)(a)(iv), (v), (vii), or(viii) or section 6.14(3)(b)(iii), (iv), (vi), or(vii) of this revenue procedure in that sameForm 3115 generate a positive § 481(a) ad-justment, the taxpayer may provide a singlenegative § 481(a) adjustment for all such

changes that are included in that Form 3115generating such negative adjustment and asingle positive § 481(a) adjustment for allsuch changes that are included in that Form3115 generating such positive adjustment.

(b) A taxpayer making this change andany change listed in section 6.14(6)(b)(i)–(iv) of this revenue procedure for the sameyear of change should file a single Form3115 for all such changes and must enterthe designated automatic accountingmethod change numbers for the changeson the appropriate line on the Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes. For example, a qualifiedsmall taxpayer must include on the singleForm 3115 the information required to becompleted on Form 3115 by a qualifiedsmall taxpayer under this revenue proce-dure for each change in method of ac-counting included on that Form 3115. Thelisted changes are:


(ii) A change under section 6.15 of thisrevenue procedure;

(iii) A change under section 6.16 ofthis revenue procedure;

(iv) A change under section 6.17 of thisrevenue procedure; and

(v) A change under section 11.07(3)(c)of this revenue procedure.

(7) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change to a method of ac-counting under this section 6.14 is “200.”


.15 Disposition of a building or structuralcomponent (§ 168; § 1.168(i)–8).


scribed in Rev. Proc. 2014–54, 2014–41I.R.B. 675, applies to a taxpayer thatwants to make a change in method ofaccounting that is specified in section6.15(3) of this revenue procedure for dis-posing of a building or a structural com-ponent or disposing of a portion of abuilding (including its structural compo-nents) to which the partial disposition rulein § 1.168(i)–8(d)(1) applies. These specified

changes are consistent with §§ 1.168(i)–8(b)(2), 1.168(i)–8(c)(4)(ii)(A), (B), and (D),1.168(i)–8(f), and 1.168(i)–8(g), as appli-cable. This change also affects the deter-mination of gain or loss from disposing ofthe building, the structural component, orthe portion of the building (including itsstructural components) and may affectwhether the taxpayer must capitalizeamounts paid to restore a unit of property(as determined under § 1.263(a)–3(e) or(f)) under § 1.263(a)–3(k).


(i) Any asset (as determined under§ 1.168(i)–8(c)(4)) that is not depreciatedunder § 168 under the taxpayer’s presentmethod of accounting and, if applicable,under the taxpayer’s proposed method ofaccounting;

(ii) Any asset subject to a general assetaccount election under § 168(i)(4) and theregulations thereunder (but see section6.17 of this revenue procedure for makinga change in method of accounting for dis-positions of tangible depreciable assetssubject to a general asset account elec-tion);

(iii) Any multiple buildings, condo-minium units, or cooperative units that aretreated as a single building under the tax-payer’s present method of accounting, orwill be treated as a single building underthe taxpayer’s proposed method of account-ing, pursuant to § 1.1250–1(a)(2)(ii);

(iv) Any disposition of a portion of anasset in a transaction described in the lastsentence in § 1.168(i)–8(d)(1) for whichthe taxpayer did not make a partial dispo-sition election in accordance with§ 1.168(i)–8(d)(2)(ii) or (iii), as applica-ble (but see section 6.10 of this revenueprocedure for making a late partial dispo-sition election and section 6.12 of thisrevenue procedure for making a partialdisposition election pursuant to§ 1.168(i)–8(d)(2)(iii)); or

(v) Any demolition of a structure towhich § 280B and § 1.280B–1 apply.




5.01(1)(f) of Rev. Proc. 2015–13 does not

Bulletin No. 2016–21 May 23, 2016907

apply to a taxpayer making this change forany taxable year beginning on or afterJanuary 1, 2012, and beginning beforeJanuary 1, 2016.

(ii) If a taxpayer makes both a changeunder this section 6.15 and a change undersection 6.01 of this revenue procedure forany taxable year beginning on or afterJanuary 1, 2012, and beginning beforeJanuary 1, 2016, on a single Form 3115for the same asset for the same year ofchange in accordance with section6.15(10)(b) or (c) of this revenue proce-dure, the eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply to the taxpayer for eitherchange.

(3) Covered changes. This section 6.15only applies to the following changes inmethods of accounting for a building (in-cluding its structural components), condo-minium unit (including its structural com-ponents), cooperative unit (including itsstructural components), or an improve-ment or addition (including its structuralcomponents) thereto:

(a) For purposes of applying§ 1.168(i)–8(c)(4) (determination of assetdisposed of), a change to the appropriateasset as determined under § 1.168(i)–8(c)(4)(ii)(A), (B), or (D), as applicable;

(b) If the taxpayer makes the changespecified in section 6.15(3)(a) of this rev-enue procedure, and if the taxpayer dis-posed of the asset as determined undersection 6.15(3)(a) of this revenue proce-dure in a taxable year prior to the year ofchange but under its present method ofaccounting continues to deduct deprecia-tion for such disposed asset, a changefrom depreciating the disposed asset torecognizing gain or loss upon dispositionor, if § 280B and § 1.280B–1 apply to thedisposition, change from depreciatingsuch disposed asset to capitalizing the losssustained on account of the demolition tothe land on which the demolished struc-ture was located;

(c) If the taxpayer makes the changespecified in section 6.15(3)(a) of this rev-enue procedure, and if the taxpayer dis-posed of a portion of the asset as deter-mined under section 6.15(3)(a) of thisrevenue procedure in a transaction de-scribed in the first sentence in § 1.168(i)–8(d)(1) in a taxable year prior to the yearof change but under its present method of

accounting continues to deduct deprecia-tion for such disposed portion, a changefrom depreciating the disposed portion torecognizing gain or loss upon dispositionor, if § 280B and § 1.280B–1 apply to thedisposition, change from depreciatingsuch disposed portion to capitalizing theloss sustained on account of the demoli-tion to the land on which the demolishedstructure was located;

(d) If the taxpayer’s present method ofaccounting for its buildings (includingtheir structural components), condomin-ium units (including their structural com-ponents), cooperative units (includingtheir structural components), and im-provements or additions (including itsstructural components) thereto that are de-preciated under § 168 is in accord with§ 1.168(i)–8(c)(4)(ii)(A), (B), and (D),and if the taxpayer disposed of an asset asdetermined under § 1.168(i)–8(c)(4)(ii)(A), (B), or (D), as applicable,in a taxable year prior to the year ofchange but under its present method ofaccounting continues to deduct deprecia-tion for such disposed asset, a changefrom depreciating the disposed asset torecognizing gain or loss upon dispositionor, if § 280B and § 1.280B–1 apply to thedisposition, change from depreciatingsuch disposed asset to capitalizing the losssustained on account of the demolition tothe land on which the demolished struc-ture was located;

(e) If the taxpayer’s present method ofaccounting for its buildings (includingtheir structural components), condomin-ium units (including their structural com-ponents), cooperative units (includingtheir structural components), and im-provements or additions (including itsstructural components) thereto that are de-preciated under § 168 is in accord with§ 1.168(i)–8(c)(4)(ii)(A), (B), and (D),and if the taxpayer disposed of a portionof an asset as determined under§ 1.168(i)–8(c)(4)(ii)(A), (B), or (D), asapplicable, in a transaction described inthe first sentence in § 1.168(i)–8(d)(1) ina taxable year prior to the year of changebut under its present method of account-ing continues to deduct depreciation forsuch disposed portion, a change from de-preciating the disposed portion to recog-nizing gain or loss upon disposition or, if§ 280B and § 1.280B–1 apply to the dis-

position, change from depreciating suchdisposed portion to capitalizing the losssustained on account of the demolition tothe land on which the demolished struc-ture was located;

(f) A change in the method of identi-fying which assets in multiple asset ac-counts or which portions of assets havebeen disposed of from a method of ac-counting not specified in § 1.168(i)–8(g)(1) or (2)(i), (ii), or (iii) (for example,the last-in, first-out (LIFO) method of ac-counting) to a method of accounting spec-ified in § 1.168(i)–8(g)(1) or (2)(i), (ii), or(iii), as applicable;

(g) If § 1.168(i)–8(f)(2) applies (dispo-sition of an asset in a multiple asset ac-count) and it is practicable from the tax-payer’s records to determine theunadjusted depreciable basis of the dis-posed asset, a change in the method ofdetermining the unadjusted depreciablebasis of the disposed asset from a methodof not using the taxpayer’s records to amethod of using the taxpayer’s records;

(h) If § 1.168(i)–8(f)(2) applies (dispo-sition of an asset in a multiple asset ac-count) and it is impracticable from thetaxpayer’s records to determine the unad-justed depreciable basis of the disposedasset, a change in the method of determin-ing the unadjusted depreciable basis of allassets in the same multiple asset accountfrom an unreasonable method (for exam-ple, discounting the cost of the replace-ment asset to its placed-in-service yearcost using the Consumer Price Index) to areasonable method;

(i) If § 1.168(i)–8(f)(3) applies (dispo-sition of a portion of an asset) and it ispracticable from the taxpayer’s records todetermine the unadjusted depreciable ba-sis of the disposed portion of the asset, achange in the method of determining theunadjusted depreciable basis of the dis-posed portion of the asset from a methodof not using the taxpayer’s records to amethod of using the taxpayer’s records;

(j) If § 1.168(i)–8(f)(3) applies (dispo-sition of a portion of an asset) and it isimpracticable from the taxpayer’s recordsto determine the unadjusted depreciablebasis of the disposed portion of the asset,a change in the method of determining theunadjusted depreciable basis of the dis-posed portion of the asset from an unrea-sonable method (for example, discounting

May 23, 2016 Bulletin No. 2016–21908

the cost of the replacement portion of theasset to its placed-in-service year cost us-ing the Consumer Price Index) to a rea-sonable method; or

(k) A change from recognizing gain orloss under § 1.168(i)–8T upon the dispo-sition of an asset (as determined under§ 1.168(i)–8(c)(4)(ii)(A), (B), or (D), asapplicable) included in a general asset ac-count to recognizing gain or loss upon thedisposition of the same asset under§ 1.168(i)–8 if: (A) the taxpayer makesthe change specified in section 6.11 of thisrevenue procedure (revocation of a gen-eral asset account election); (B) the tax-payer made a qualifying disposition elec-tion under § 1.168(i)–1T(e)(3)(iii) in ataxable year prior to the year of change forthe disposition of such asset; (C) the tax-payer’s present method of accounting forsuch asset is in accord with § 1.168(i)–8(c)(4)(ii)(A), (B), or (D), as applicable;and (D) the taxpayer recognized a gain orloss under § 1.168(i)–8T upon the dispo-sition of such asset in a taxable year priorto the year of change.

(4) Examples. The following examplesillustrate the covered changes specified insection 6.15(3) of this revenue procedure.

(a) Example 1. X, a calendar-year taxpayer, ac-quired and placed in service a building and its struc-tural components in 2000. In 2005, X constructedand placed in service an addition to this building. Xdepreciates the building, the addition, and theirstructural components under § 168. A change by Xto treating the original building (including its struc-tural components) as an asset and the addition to thebuilding (including the structural components ofsuch addition) as a separate asset for dispositionpurposes is a change described in section 6.15(3)(a)of this revenue procedure solely for purposes of§ 1.168(i)–8(c)(4).

(b) Example 2. Y, a calendar year taxpayer, ac-quired and placed in service a building and its struc-tural components in 1990. Y depreciates this build-ing and its structural components under § 168. In2000, a tornado damaged the roof and, as a result, Yreplaced the entire roof of the building. Y did notrecognize a loss on the retirement of the original roofand continues to depreciate the original roof. Y alsocapitalized the cost of the replacement roof and hasbeen depreciating this roof under § 168 since 2000.Because the original roof was disposed of as a resultof a casualty event described in § 165, a change byY from depreciating the original roof to recognizinga loss upon its retirement is a covered change de-scribed in section 6.15(3)(e) of this revenue proce-dure solely for purposes of § 1.168(i)–8.

(c) Example 3. The facts are the same as inExample 2, except a tornado did not occur, but Y stillreplaced the entire roof of the building in 2000.Because the original roof was not disposed of as aresult of any of the events described in the first

sentence in § 1.168(i)–8(d)(1) that require a partialdisposition, a partial disposition election must bemade to change from depreciating the original roofto recognizing a loss upon its retirement. Pursuant tosection 6.15(1)(b)(iv) of this revenue procedure, sec-tion 6.15 does not apply to the disposition of theoriginal roof in 2000. But see section 6.10 of thisrevenue procedure for making the late partial dispo-sition election under § 1.168(i)–8(d)(2)(i) for theoriginal roof.

(5) Manner of making change.(a) A taxpayer (including a qualified

small taxpayer as defined in section6.01(4)(b) of this revenue procedure)making this change must attach to itsForm 3115 a statement with the follow-ing:

(i) A description of the assets to whichthis change applies;

(ii) If the taxpayer is making a changespecified in section 6.15(3)(a) of this rev-enue procedure, a description of the assetsfor disposition purposes under the taxpay-er’s present and proposed methods of ac-counting;

(iii) If the taxpayer is making thechange specified in section 6.15(3)(f) ofthis revenue procedure, a description ofthe methods of identifying which assetshave been disposed of under the taxpay-er’s present and proposed methods of ac-counting;

(iv) If the taxpayer is making thechange specified in section 6.15(3)(h) or(j) of this revenue procedure, a descriptionof the methods of determining the unad-justed depreciable basis of the disposedasset or disposed portion of the asset, asapplicable, under the taxpayer’s presentand proposed methods of accounting; and

(v) If any asset is public utility propertywithin the meaning of § 168(i)(10), astatement providing that the taxpayeragrees to the following additional termsand conditions:

(A) A normalization method of ac-counting (within the meaning of§ 168(i)(9)) will be used for the publicutility property subject to the application;

(B) As of the beginning of the year ofchange, the taxpayer will adjust its de-ferred tax reserve account or similar ac-count in the taxpayer’s regulatory booksof account by the amount of the deferralof federal income tax liability associatedwith the § 481(a) adjustment applicable tothe public utility property subject to theapplication; and

(C) Within 30 calendar days of filingthe federal income tax return for the yearof change, the taxpayer will provide acopy of the completed application to anyregulatory body having jurisdiction overthe public utility property subject to theapplication.

(b) A qualified small taxpayer, as de-fined in section 6.01(4)(b) of this revenueprocedure, is required to complete onlythe following information on Form 3115(Rev. December 2015) to make thischange:




15b, 16, 17, and 19 if the qualified smalltaxpayer is not making a change inmethod of accounting specified in section6.15(3)(h) and (j) of this revenue proce-dure;

(v) Part II, all lines except lines 13,15b, 16c, 17, and 19 if the qualified smalltaxpayer is making a change in method ofaccounting specified in section 6.15(3)(h)or (j) of this revenue procedure;

(v) Part IV, all lines except line 25; and(vi) Schedule E.(6) No ruling on asset. The consent

granted under section 9 of Rev. Proc.2015–13 for a change specified in section6.15(3)(a) of this revenue procedure is nota determination by the Commissioner thatthe taxpayer is using the appropriate assetunder § 1.168(i)–8(c)(4) for determiningwhat asset is disposed of by the taxpayerand does not create any presumption thatthe proposed asset is permissible under§ 1.168(i)–8(c)(4). The director will as-certain whether the taxpayer’s determina-tion of its asset under § 1.168(i)–8(c)(4) ispermissible.

(7) Section 481(a) adjustment.(a) A taxpayer changing its method of

accounting under this section 6.15 mayuse statistical sampling in determining the§ 481(a) adjustment by following theguidance provided in Rev. Proc. 2011–42,2011–37 I.R.B. 318.

(b) A taxpayer that met the scope re-quirements of section 4 of Rev. Proc.2015–20, 2015–9 I.R.B. 694, and thatchanged its method of accounting undersection 6.38 of Rev. Proc. 2015–14

Bulletin No. 2016–21 May 23, 2016909

(which is now this section 6.15) by fol-lowing section 5 of Rev. Proc. 2015–20 isrequired to calculate a section § 481(a)adjustment as of the first day of the year ofchange that takes into account only dispo-sitions in taxable years beginning on orafter January 1, 2014.

(8) Section 481(a) adjustment period.(a) A taxpayer must take the entire

amount of the § 481(a) adjustment intoaccount in computing taxable income forthe year of change:

(i) If the taxpayer is making the changespecified in section 6.15(3)(a) of this rev-enue procedure and if the taxpayer recog-nized a gain or loss under § 1.168(i)–8Ton the disposition of the asset (or if appli-cable, a portion thereof) in a taxable yearprior to the year of change;

(ii) If the taxpayer is making thechange specified in section 6.15(3)(k) ofthis revenue procedure; or

(iii) If the taxpayer is a qualified tax-payer as defined in section 4.01 of Rev.Proc. 2015–56, 2015–49 I.R.B. 827, andthat is within the scope of section 3 ofRev. Proc. 2015–56, and is making thechange specified in section 5.02(5)(b) ofRev. Proc. 2015–56 on or before the firsttaxable year that the qualified taxpayer usesthe remodel-refresh safe harbor provided insection 5.02 of Rev. Proc. 2015–56.

(b) If section 6.15(8)(a) of this revenueprocedure does not apply, see section 7.03of Rev. Proc. 2015–13 for the § 481(a)adjustment period.

(c) Example. (i) Y, a fiscal year taxpayer with ataxable year beginning December 1 and ending No-vember 30, acquired and placed in service a buildingand its structural components in 2000. Y depreciatesthis building and its structural components under§ 168. The roof is a structural component of thebuilding. Y replaced the entire roof in June 2010. Onits federal tax return for the taxable year endedNovember 30, 2010, Y did not recognize a loss onthe retirement of the original roof and continues todepreciate the original roof. Y also capitalized thecost of the replacement roof and has been depreci-ating this roof under § 168 since June 2010. Theadjusted depreciable basis of the original roof at thetime of its retirement in 2010 (taking into accountthe applicable convention) is $11,000, and Yclaimed depreciation of $1,000 for such roof after itsretirement (taking into account the applicable con-vention) and before the taxable year ended Novem-ber 30, 2013 (2012 taxable year). Also the 12-monthallowable depreciation deduction for the originalroof is $500 for the 2012 taxable year and $500 forthe taxable year ended November 30, 2014 (2013taxable year).

(ii) In accordance with § 1.168(i)–8T(c)(4)(ii)(A) and (B) and section 6.29(3)(a) and(b) of the APPENDIX to Rev. Proc. 2011–14, asmodified by Rev. Proc. 2012–20, 2012–14 I.R.B.700, Y filed with its federal income tax return for thetaxable year ended November 30, 2013, a Form 3115to treat the building as an asset and each structuralcomponent of the building as a separate asset fordisposition purposes and also to change from depre-ciating the original roof to recognizing a loss uponits retirement. The amount of the net negative§ 481(a) adjustment on this Form 3115 is $10,000(adjusted depreciable basis of $11,000 for the orig-inal roof at the time of its retirement (taking intoaccount the applicable convention) less depreciationof $1,000 claimed for such roof after its retirement(taking into account the applicable convention) andbefore the 2012 taxable year).

(iii) Y complies with § 1.168(i)–8 beginningwith its taxable year ending November 30, 2015(2014 taxable year), but decides not to make any latepartial disposition election under section 6.10 of thisrevenue procedure. In accordance with section6.15(3)(a) of this revenue procedure, Y files a Form3115 with its federal income tax return for the 2014taxable year to change to treating the original build-ing (including its original roof and other originalstructural components) as an asset and the replace-ment roof as a separate asset for disposition pur-poses. Because Y is not making a late partial dispo-sition election for the original roof, Y does notrecognize the net loss of $10,000 upon the retirementof the original roof under § 1.168(i)–8 and Y willcontinue to depreciate the original roof. Thus, the netpositive § 481(a) adjustment for this change is$9,000 (net loss of $10,000 claimed on the 2012return for the retirement of the original roof lessdepreciation of $1,000 for the original roof for the2012 and 2013 taxable years) and is included in Y’staxable income for the 2014 taxable year.

(9) No audit protection. A taxpayercalculating a § 481(a) adjustment undersection 6.15(7)(b) of this revenue proce-dure that takes into account only disposi-tions in taxable years beginning on orafter January 1, 2014, does not receiveaudit protection under section 8.01 ofRev. Proc. 2015–13 for dispositions sub-ject to a change under this section 6.15 intaxable years beginning before January 1,2014. See section 5.04 of Rev. Proc.2015–20.


more than one asset for the same year ofchange should file a single Form 3115 forall such assets and provide a single net§ 481(a) adjustment for all the changesincluded in that Form 3115. If one or moreof the changes in that single Form 3115generate a negative § 481(a) adjustmentand other changes in that same Form 3115generate a positive § 481(a) adjustment,the taxpayer may provide a single nega-

tive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such negative adjustmentand a single positive § 481(a) adjustmentfor all the changes that are included in thatForm 3115 generating such positive ad-justment.

(b) A taxpayer making this change and anychange listed in section 6.15(10)(b)(i)–(iv) ofthis revenue procedure for the same year ofchange should file a single Form 3115 forall of such changes and must enter the des-ignated automatic accounting methodchange numbers for the changes on the ap-propriate line on the Form 3115. See section6.03(1)(b) of Rev. Proc. 2015–13 for infor-mation on making concurrent changes. Forexample, a qualified small taxpayer mustinclude on the single Form 3115 the infor-mation required to be completed on Form3115 by a qualified small taxpayer underthis revenue procedure for each change inmethod of accounting included on that Form3115. The listed changes are:





(c) A taxpayer making this change anda change under section 6.11 of this reve-nue procedure (revocation of a generalasset account election) and/or any changelisted in section 6.15(10)(c)(i)–(iii) of thisrevenue procedure for the same year ofchange should file a single Form 3115 forall such changes and must enter the des-ignated automatic accounting methodchange numbers for the changes on theappropriate line on the Form 3115. Thissection 6.15(10)(c) applies only if all ofthese changes are made for any taxableyear beginning on or after January 1,2012, and beginning before January 1,2015. See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes. For example, a qualifiedsmall taxpayer must include on the singleForm 3115 the information required to becompleted on Form 3115 by a qualifiedsmall taxpayer under this revenue proce-dure for each change in method of ac-counting included on that Form 3115. Thelisted changes are:

May 23, 2016 Bulletin No. 2016–21910


(ii) A change under section 6.14(3)(a)of this revenue procedure; and

(iii) A change under section 6.16 ofthis revenue procedure.


(12) Contact information. For furtherinformation regarding a change under thissection, contact Patrick Clinton at (202)317-7005 (not a toll-free call).

.16 Dispositions of tangible depreciableassets (other than a building or itsstructural components) (§ 168;§ 1.168(i)–8).


scribed in Rev. Proc. 2014–54, 2014–41I.R.B. 675, applies to a taxpayer thatwants to make a change in method ofaccounting that is specified in section6.16(3) of this revenue procedure for dis-posing of § 1245 property or a depreciableland improvement or disposing of a por-tion of § 1245 property or a depreciableland improvement to which the partial dis-position rule in § 1.168(i)–8(d)(1) applies.These specified changes are consistentwith §§ 1.168(i)–8(c)(4)(i), 1.168(i)–8(c)(4)(ii)(C) and (D), 1.168(i)–8(f), and1.168(i)–8(g), as applicable. This changealso affects the determination of gain orloss from disposing of the § 1245 prop-erty, the depreciable land improvement, ora portion of the § 1245 property or depre-ciable land improvement, and may affectwhether the taxpayer must capitalizeamounts paid to restore a unit of property(as determined under § 1.263(a)–3(e) or(f)) under § 1.263(a)–3(k).


(i) Any asset (as determined under§ 1.168(i)–8(c)(4)) that is not depreciatedunder § 168 under the taxpayer’s presentmethod of accounting and, if applicable,under the taxpayer’s proposed method ofaccounting;

(ii) Any building (including its struc-tural components), condominium unit (in-cluding its structural components), coop-

erative unit (including its structuralcomponents), or an improvement or addi-tion (including its structural components)thereto (but see section 6.15 of this reve-nue procedure for making this change);

(iii) Any asset subject to a general assetaccount election under § 168(i)(4) and theregulations thereunder (but see section6.17 of this revenue procedure for makinga change for dispositions of tangible de-preciable assets subject to a general assetaccount election); or

(iv) Any disposition of a portion of anasset in a transaction described in the lastsentence in § 1.168(i)–8(d)(1) for whichthe taxpayer did not make a partial dispo-sition election in accordance with§ 1.168(i)–8(d)(2)(ii) or (iii), as applica-ble (but see section 6.10 of this revenueprocedure for making a late partial dispo-sition election and section 6.12 of this rev-enue procedure for making a partial dispo-sition election pursuant to § 1.168(i)–8(d)(2)(iii)).


(a) In general. The eligibility rule insection 5.01(1)(d) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to ataxpayer making this change.



(ii) If a taxpayer makes both a changeunder this section 6.16 and a change undersection 6.01 of this revenue procedure forany taxable year beginning on or afterJanuary 1, 2012, and beginning beforeJanuary 1, 2016, on a single Form 3115for the same asset for the same year ofchange in accordance with section6.16(9)(b) or (c) of this revenue proce-dure, the eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply to the taxpayer for eitherchange.

(3) Covered changes. This section 6.16only applies to the following changes inmethods of accounting for a § 1245 prop-erty, a depreciable land improvement, oran improvement or addition thereto:

(a) For purposes of applying§ 1.168(i)–8(c)(4) (determination of asset

disposed of), a change to the appropriateasset as determined under § 1.168(i)–8(c)(4)(i), (ii)(C), or (ii)(D), as applicable;

(b) If the taxpayer makes the changespecified in section 6.16(3)(a) of this rev-enue procedure, and if the taxpayer dis-posed of the asset as determined undersection 6.16(3)(a) of this revenue proce-dure in a taxable year prior to the year ofchange but continues to deduct deprecia-tion for such disposed asset under the tax-payer’s present method of accounting, achange from depreciating the disposed as-set to recognizing gain or loss upon dis-position;

(c) If the taxpayer makes the changespecified in section 6.16(3)(a) of this rev-enue procedure, and if the taxpayer dis-posed of a portion of the asset as deter-mined under section 6.16(3)(a) of thisrevenue procedure in a transaction de-scribed in the first sentence in § 1.168(i)–8(d)(1) in a taxable year prior to the yearof change but under its present method ofaccounting continues to deduct deprecia-tion for such disposed portion, a changefrom depreciating the disposed portion torecognizing gain or loss upon disposition;

(d) If the taxpayer’s present method ofaccounting for its § 1245 property, depre-ciable land improvements, or improve-ments or additions thereto is in accordwith § 1.168(i)–8(c)(4)(i) or (ii), as appli-cable, and if the taxpayer disposed of anasset as determined under § 1.168(i)–8(c)(4)(i) or (ii), as applicable, in a taxableyear prior to the year of change but underits present method of accounting contin-ues to deduct depreciation for this dis-posed asset, a change from depreciatingthe disposed asset to recognizing gain orloss upon disposition;

(e) If the taxpayer’s present method ofaccounting for its § 1245 property, depre-ciable land improvements, or improve-ments or additions thereto is in accordwith § 1.168(i)–8(c)(4)(i) or (ii), as appli-cable, and if the taxpayer disposed of aportion of an asset as determined under§ 1.168(i)–8(c)(4)(i) or (ii), as applicable,in a transaction described in the first sen-tence in § 1.168(i)–8(d)(1) in a taxableyear prior to the year of change but underits present method of accounting contin-ues to deduct depreciation for such dis-posed portion, a change from depreciating

Bulletin No. 2016–21 May 23, 2016911

the disposed portion to recognizing gainor loss upon disposition;

(f) A change in the method of identi-fying which assets in multiple asset ac-counts or which portions of assets havebeen disposed of from a method of ac-counting not specified in § 1.168(i)–8(g)(1) or (2)(i), (ii), or (iii) (for example,the last-in, first-out (LIFO) method of ac-counting) to a method of accounting spec-ified in § 1.168(i)–8(g)(1) or (2)(i), (ii), or(iii), as applicable;

(g) If § 1.168(i)–8(f)(2) applies (dispo-sition of an asset in a multiple asset ac-count) and it is practicable from the tax-payer’s records to determine theunadjusted depreciable basis of the dis-posed asset, a change in the method ofdetermining the unadjusted depreciablebasis of the disposed asset from a methodof not using the taxpayer’s records to amethod of using the taxpayer’s records;

(h) If § 1.168(i)–8(f)(2) applies (dispo-sition of an asset in a multiple asset ac-count) and it is impracticable from thetaxpayer’s records to determine the unad-justed depreciable basis of the disposedasset, a change in the method of determin-ing the unadjusted depreciable basis of allassets in the same multiple asset accountfrom an unreasonable method (for exam-ple, discounting the cost of the replace-ment asset to its placed-in-service yearcost using the Consumer Price Index) to areasonable method;

(i) If § 1.168(i)–8(f)(3) applies (dispo-sition of a portion of an asset) and it ispracticable from the taxpayer’s records todetermine the unadjusted depreciable ba-sis of the disposed portion of the asset, achange in the method of determining theunadjusted depreciable basis of the dis-posed portion of the asset from a methodof not using the taxpayer’s records to amethod of using the taxpayer’s records;

(j) If § 1.168(i)–8(f)(3) applies (dispo-sition of a portion of an asset) and it isimpracticable from the taxpayer’s recordsto determine the unadjusted depreciablebasis of the disposed portion of the asset,a change in the method of determining theunadjusted depreciable basis of the dis-posed portion of the asset from an unrea-sonable method (for example, discountingthe cost of the replacement portion of theasset to its placed-in-service year cost us-

ing the Consumer Price Index) to a rea-sonable method; or

(k) A change from recognizing gain orloss under § 1.168(i)–8T upon the dispo-sition of a section 1245 property, depre-ciable land improvement, or improvementor addition thereto included in a generalasset account to recognizing gain or lossupon the disposition of the same assetunder § 1.168(i)–8 if: (A) the taxpayermakes the change specified in section 6.11of this revenue procedure (revocation of ageneral asset account election); (B) thetaxpayer made a qualifying dispositionelection under § 1.168(i)–1T(e)(3)(iii) in ataxable year prior to the year of change forthe disposition of such asset; (C) the tax-payer’s present method of accounting forsuch asset is in accord with § 1.168(i)–8(c)(4)(i) or (ii), as applicable; and (D) thetaxpayer recognized a gain or loss under§ 1.168(i)–8T on the disposition of suchasset in a taxable year prior to the year ofchange.


small taxpayer as defined in section6.01(4)(b) of this revenue procedure) mak-ing this change must attach to its Form 3115a statement with the following:


(ii) If the taxpayer is making a changespecified in section 6.16(3)(a) of this rev-enue procedure, a description of the assetsfor disposition purposes under the taxpay-er’s present and proposed methods of ac-counting;

(iii) If the taxpayer is making thechange specified in section 6.16(3)(f) ofthis revenue procedure, a description ofthe methods of identifying which assetshave been disposed of under the taxpay-er’s present and proposed methods of ac-counting;

(iv) If the taxpayer is making thechange specified in section 6.16(3)(h) or(j) of this revenue procedure, a descriptionof the methods of determining the unad-justed depreciable basis of the disposedasset or disposed portion of the asset, asapplicable, under the taxpayer’s presentand proposed methods of accounting; and

(v) If any asset is public utility propertywithin the meaning of § 168(i)(10), astatement providing that the taxpayer

agrees to the following additional termsand conditions:




(b) A qualified small taxpayer, as definedin section 6.01(4)(b) of this revenue proce-dure, is required to complete only the fol-lowing information on Form 3115 (Rev.December 2015) to make this change:




15b, 16, 17, and 19 if the qualified smalltaxpayer is not making a change inmethod of accounting specified in section6.16(3)(h) and (j) of this revenue proce-dure;

(v) Part II, all lines except lines 13,15b, 16c, 17, and 19 if the qualified smalltaxpayer is making a change in method ofaccounting specified in section 6.16(3)(h)or (j) of this revenue procedure;


granted under section 9 of Rev. Proc.2015–13 for a change specified in section6.16(3)(a) of this revenue procedure is nota determination by the Commissioner thatthe taxpayer is using the appropriate assetunder § 1.168(i)–8(c)(4) for determiningwhat asset is disposed of by the taxpayerand does not create any presumption thatthe proposed asset is permissible under§ 1.168(i)–8(c)(4). The director will as-certain whether the taxpayer’s determina-

May 23, 2016 Bulletin No. 2016–21912

tion of its asset under § 1.168(i)–8(c)(4) ispermissible.

(6) Section 481(a) adjustment.(a) A taxpayer changing its method of

accounting under section 6.16 of the reve-nue procedure may use statistical samplingin determining the § 481(a) adjustment byfollowing the guidance provided in Rev.Proc. 2011–42, 2011–37 I.R.B. 318.

(b) A taxpayer that met the scope re-quirements of section 4 of Rev. Proc.2015–20, 2015–9 I.R.B. 694, and thatchanged its method of accounting undersection 6.39 of Rev. Proc. 2015–14(which is now this section 6.16) by fol-lowing section 5 of Rev. Proc. 2015–20 isrequired to calculate a section § 481(a)adjustment as of the first day of the year ofchange that takes into account only dispo-sitions in taxable years beginning on orafter January 1, 2014.



(i) If the taxpayer is making the changespecified in section 6.16(3)(a) of this rev-enue procedure and if the taxpayer recog-nized a gain or loss under § 1.168(i)–8Ton the disposition of the § 1245 property,depreciable land improvement, or im-provement or addition thereto (or if appli-cable, a portion of such asset) in a taxableyear prior to the year of change; or

(ii) If the taxpayer is making thechange specified in section 6.16(3)(k) ofthis revenue procedure.


(8) No audit protection. A taxpayercalculating a § 481(a) adjustment undersection 6.16(6)(b) of this revenue proce-dure that takes into account only disposi-tions in taxable years beginning on orafter January 1, 2014, does not receiveaudit protection under section 8.01 ofRev. Proc. 2015–13 for dispositions sub-ject to a change under this section 6.16 intaxable years beginning before January 1,2014. See section 5.05 of Rev. Proc.2015–20.


more than one asset for the same year of

change should file a single Form 3115 forall such assets and provide a single net§ 481(a) adjustment for all the changesincluded in that Form 3115. If one or moreof the changes in that single Form 3115generate a negative § 481(a) adjustmentand other changes in that same Form 3115generate a positive § 481(a) adjustment,the taxpayer may provide a single nega-tive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such negative adjustmentand a single positive § 481(a) adjustmentfor all the changes that are included inthat Form 3115 generating such positiveadjustment.

(b) A taxpayer making this change andany change listed in section6.16(9)(b)(i)–(iv) of this revenue proce-dure for the same year of change shouldfile a single Form 3115 for all of suchchanges and must enter the designatedautomatic accounting method changenumbers for the changes on the appro-priate line on the Form 3115. See sec-tion 6.03(1)(b) of Rev. Proc. 2015–13for information on making concurrentchanges. For example, a qualified smalltaxpayer must include on the singleForm 3115 the information required tobe completed on Form 3115 by a qual-ified small taxpayer under this revenueprocedure for each change in methodof accounting included on that Form3115. The listed changes are:





(c) A taxpayer making this changeand a change under section 6.11 of thisrevenue procedure (revocation of a gen-eral asset account election) and/or anychange listed in section 6.16(9)(c)(i)–(iii) of this revenue procedure for thesame year of change should file a singleForm 3115 for all such changes andmust enter the designated automatic ac-counting method change numbers forthe changes on the appropriate line onthe Form 3115. This section 6.16(9)(c)applies only if all of these changes aremade for any taxable year beginning on

or after January 1, 2012, and beginningbefore January 1, 2015. See section6.03(1)(b) of Rev. Proc. 2015–13 forinformation on making concurrentchanges. For example, a qualified smalltaxpayer must include on the singleForm 3115 the information required tobe completed on Form 3115 by a qual-ified small taxpayer under this revenueprocedure for each change in method ofaccounting included on that Form 3115.The listed changes are:


(ii) A change under section 6.14(3)(a)of this revenue procedure; and

(iii) A change under section 6.15 ofthis revenue procedure.


(11) Contact information. For furtherinformation regarding a change under thissection, contact Patrick Clinton at (202)317-7005 (not a toll-free call).

.17 Dispositions of tangible depreciableassets in a general asset account(§ 168(i)(4); § 1.168(i)–1).


scribed in Rev. Proc. 2014–54, 2014–41I.R.B. 675, applies to a taxpayer thatwants to make a change in method ofaccounting that is specified in section6.17(3) of this revenue procedure for dis-posing of an asset subject to a generalasset account election under § 168(i)(4)and the regulations thereunder. Thesespecified changes are consistent with§§ 1.168(i)–1(e)(1), 1.168(i)–1(e)(2)(viii),and 1.168(i)–1(j), as applicable. Thischange also may affect the determinationof gain or loss from disposing of the assetand may affect whether the taxpayer mustcapitalize amounts paid to restore a unit ofproperty (as determined under § 1.263(a)–3(e) or (f)) under § 1.263(a)–3(k).


(i) Any asset (as determined under§ 1.168(i)–1(e)(2)(viii)) that is not depreci-ated under § 168 under the taxpayer’s pres-

Bulletin No. 2016–21 May 23, 2016913

ent method of accounting and, if applicable,proposed method of accounting; or

(ii) Any asset not subject to a generalasset account election under § 168(i)(4)and the regulations thereunder (but seesections 6.15 and 6.16 of this revenueprocedure for making a change for dis-positions of tangible depreciable assetsnot subject to a general asset accountelection).





(ii) If a taxpayer makes both a changeunder this section 6.17 and a change undersection 6.01 of this revenue procedure forany taxable year beginning on or afterJanuary 1, 2012, and beginning beforeJanuary 1, 2016, on a single Form 3115for the same asset for the same year ofchange in accordance with section6.17(7)(b) of this revenue procedure, theeligibility rules in sections 5.01(1)(d)and (f) of Rev. Proc. 2015–13 donot apply to the taxpayer for eitherchange.

(3) Covered changes. This section 6.17only applies to the following changes inmethods of accounting for an asset subjectto a general asset account election under§ 168(i)(4) and the regulations thereunder:

(a) For purposes of applying§ 1.168(i)–1(e)(2)(viii) (determination ofasset disposed of), a change to the appro-priate asset as determined under§ 1.168(i)–1(e)(2)(viii)(A) or (B), as ap-plicable;

(b) A change in the method of identi-fying which assets or which portions ofassets have been disposed of from amethod of accounting not specified in§ 1.168(i)–1(j)(2)(i)(A), (B), (C), or (D)(for example, the last-in, first-out (LIFO)method of accounting) to a method ofaccounting specified in § 1.168(i)–1(j)(2)(i)(A), (B), (C), or (D), as applicable;

(c) If § 1.168(i)–1(j)(3) applies (basisof disposed asset or disposed portion of an

asset) and it is practicable from the tax-payer’s records to determine the unad-justed depreciable basis of the disposedasset or the disposed portion of an asset,as applicable, a change in the method ofdetermining the unadjusted depreciablebasis of the disposed asset or the disposedportion of an asset, as applicable, from amethod of not using the taxpayer’s re-cords to a method of using the taxpayer’srecords; or

(d) If § 1.168(i)–1(j)(3) applies (basisof disposed asset or disposed portion ofan asset) and it is impracticable from thetaxpayer’s records to determine the un-adjusted depreciable basis of the dis-posed asset or the disposed portion of anasset, as applicable, a change in themethod of determining the unadjusteddepreciable basis of all assets in thesame general asset account from an un-reasonable method (for example, dis-counting the cost of the replacement as-set to its placed-in-service year costusing the Consumer Price Index) to areasonable method.


small taxpayer as defined in section6.01(4)(b) of this revenue procedure) mak-ing this change must attach to its Form 3115a statement with the following:


(ii) If the taxpayer is making thechange specified in section 6.17(3)(a) ofthis revenue procedure, a description ofthe assets for disposition purposes underthe taxpayer’s present and proposed meth-ods of accounting;

(iii) If the taxpayer is making thechange specified in section 6.17(3)(b) ofthis revenue procedure, a description ofthe methods of identifying which assetshave been disposed of under the taxpay-er’s present and proposed methods of ac-counting;

(iv) If the taxpayer is making thechange specified in section 6.17(3)(d) ofthis revenue procedure, a description ofthe methods of determining the unad-justed depreciable basis of the disposedasset or disposed portion of the asset, asapplicable, under the taxpayer’s presentand proposed methods of accounting;and

(v) If any asset is public utility propertywithin the meaning of § 168(i)(10), astatement providing that the taxpayeragrees to the following additional termsand conditions:




(b) A qualified small taxpayer, as definedin section 6.01(4)(b) of this revenue proce-dure, is required to complete only the fol-lowing information on Form 3115 (Rev.December 2015) to make this change:



(iii) Part I;(iv) Part II, all lines except lines 13, 15b,

16, 17, and 19 if the qualified small taxpayeris not making a change in method of ac-counting specified in section 6.17(3)(a) and(d) of this revenue procedure;

(v) Part II, all lines except lines 13,15b, 16c, 17, and 19 if the qualified smalltaxpayer is making a change in method ofaccounting specified in section 6.17(3)(a)or (d) of this revenue procedure;


granted under section 9 of Rev. Proc.2015–13 for a change specified in section6.17(3)(a) of this revenue procedure is nota determination by the Commissioner thatthe taxpayer is using the appropriate assetunder § 1.168(i)–1(e)(2)(viii) for deter-mining what asset is disposed of by thetaxpayer and does not create any pre-sumption that the proposed asset is per-

May 23, 2016 Bulletin No. 2016–21914

missible under § 1.168(i)–1(e)(2)(viii).The director will ascertain whether thetaxpayer’s determination of its asset under§ 1.168(i)–1(e)(2)(viii) is permissible.



(i) If the taxpayer makes the changespecified in section 6.17(3)(a) of this rev-enue procedure and if the taxpayer recog-nized a gain or loss under § 1.168(i)–1T or§ 1.168(i)–8T, as applicable, on the dis-position of a portion of the asset in ataxable year prior to the year of change; or

(iii) If the taxpayer is a qualified tax-payer as defined in section 4.01 of Rev.Proc. 2015–56, 2015–49 I.R.B. 827, andthat is within the scope of section 3 ofRev. Proc. 2015–56, and is making thechange specified in section 5.02(5)(b) ofRev. Proc. 2015–56 on or before the firsttaxable year that the qualified taxpayer usesthe remodel-refresh safe harbor provided insection 5.02 of Rev. Proc. 2015–56.


(c) Example. (i) X, a fiscal year taxpayer with ataxable year beginning December 1 and ending No-vember 30, acquired and placed in service a buildingand its structural components in 2000. X depreciatesthis building and its structural components under§ 168. The roof is a structural component of thebuilding. X replaced the entire roof in June 2010. Onits federal tax return for the taxable year endedNovember 30, 2010, X did not recognize a loss onthe retirement of the original roof and continues todepreciate the original roof. X also capitalized thecost of the replacement roof and has been depreci-ating this roof under § 168 since June 2010. Theadjusted depreciable basis of the original roof at thetime of its retirement in 2010 (taking into accountthe applicable convention) is $11,000, and Xclaimed depreciation of $1,000 for such roof after itsretirement (taking into account the applicable con-vention) and before the taxable year ended Novem-ber 30, 2013 (2012 taxable year). Also the 12-monthallowable depreciation deduction for the originalroof is $500 for the 2012 taxable year and $500 for

the taxable year ended November 30, 2014 (2013taxable year).

(ii) In accordance with § 1.168(i)–1T and section6.32(1)(a) of the APPENDIX to Rev. Proc. 2011–14,as modified by Rev. Proc. 2012–20, 2012–14 I.R.B.700, X filed with its federal tax return for the taxableyear ended November 30, 2013, a Form 3115 to: (1)make a late general asset account election to includethe building (including its structural components)placed in service in 2000 in one general asset ac-count and the replacement roof in a separate generalasset account; and (2) make a late qualifying dispo-sition election for the retirement of the original roofin 2010. As a result, X removed the original rooffrom the general asset account and reported a netnegative § 481(a) adjustment on this Form 3115 of$10,000 (adjusted depreciable basis of $11,000 forthe original roof at the time of its retirement (takinginto account the applicable convention) less depre-ciation of $1,000 claimed for such roof after itsretirement (taking into account the applicable con-vention) and before the 2012 taxable year).

(iii) X complies with § 1.168(i)–1 beginning withits taxable year ending November 30, 2015 (2014taxable year). In accordance with section 6.17(3)(a)of this revenue procedure, X files a Form 3115 withits federal income tax return for the 2014 taxableyear to change to treating the building (including itsoriginal roof and other original structural compo-nents) placed in service in 2000 as an asset and thereplacement roof as a separate asset for dispositionpurposes. As a result, X must include the originalroof that X retired in 2010 in the general assetaccount. Thus, the net positive § 481(a) adjustmentfor this change is $9,000 (net loss of $10,000claimed on the 2012 return for the retirement of theoriginal roof less depreciation of $1,000 for theoriginal roof for the 2012 and 2013 taxable years)and is included in X’s taxable income for the 2014taxable year.


more than one asset for the same year ofchange should file a single Form 3115 forall such assets and provide a single net§ 481(a) adjustment for all the changesincluded in that Form 3115. If one or moreof the changes in that single Form 3115generate a negative § 481(a) adjustmentand other changes in that same Form 3115generate a positive § 481(a) adjustment,the taxpayer may provide a single nega-tive § 481(a) adjustment for all thechanges that are included in that Form3115 generating such negative adjustmentand a single positive § 481(a) adjustment

for all the changes that are included in thatForm 3115 generating such positive ad-justment.

(b) A taxpayer making this change andany change listed in section 6.17(7)(b)(i)–(iv) of this revenue procedure for the sameyear of change should file a single Form3115 for all of such changes and mustenter the designated automatic accountingmethod change numbers for the changeson the appropriate line on the Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes. For example, a qualifiedsmall taxpayer must include on the singleForm 3115 the information required to becompleted on Form 3115 by a qualifiedsmall taxpayer under this revenue proce-dure for each change in method of ac-counting included on that Form 3115. Thelisted changes are:







.18 Summary of certain changes inmethods of accounting related todispositions of MACRS property.

(1) Final regulations. The followingchart summarizes the changes in methodsof accounting under § 1.167(a)–4,§ 1.168(i)–1, § 1.168(i)–7, and§ 1.168(i)–8 that a taxpayer may makeunder Rev. Proc. 2016–29.

Bulletin No. 2016–21 May 23, 2016915

FINAL REGULATION SECTIONSECTION # in in REV.

PROC. 2016–29

DESIGNATEDCHANGE

NUMBER (DCN)

§ 1.167(a)–4, Depreciation of leasehold improvements 6.13 199

General Asset Accounts:

a. § 1.168(i)–1(c), Change in grouping assets 6.14 200

b. § 1.168(i)–1(e)(2)(viii), Change in determining asset disposed of 6.17 207

c. § 1.168(i)–1(j)(2), Change in method of identifying which assets or por-tions of assets have been disposed of from one method to another methodspecified in § 1.168(i)–1(j)(2)

6.14 200

d. § 1.168(i)–1(j)(2), Change in method of identifying which assets orportions of assets have been disposed of from a method not specified in§ 1.168(i)–1(j)(2) to a method specified in § 1.168(i)–1(j)(2)

6.17 207

e. § 1.168(i)–1(j)(3), Change in determining unadjusted depreciable basisof disposed asset or disposed portion of an asset from one reasonablemethod to another reasonable method when it is impracticable from thetaxpayer’s records to determine the unadjusted depreciable basis of dis-posed asset or disposed portion of asset

6.14 200

f. § 1.168(i)–1(j)(3), Change in determining unadjusted depreciable basisof disposed asset or disposed portion of an asset from not using to usingthe taxpayer’s records when it is practicable from the taxpayer’s recordsto determine the unadjusted depreciable basis of disposed asset or dis-posed portion of asset

6.17 207

g. § 1.168(i)–1(j)(3), Change in determining unadjusted depreciable basisof disposed asset or disposed portion of an asset from an unreasonablemethod to a reasonable method when it is impracticable from the taxpay-er’s records to determine the unadjusted depreciable basis of disposed as-set or disposed portion of asset

6.17 207

Single Asset Accounts or Multiple Asset Accounts for MACRS Property:

a. § 1.168(i)–7, Change from single asset accounts to multiple asset ac-counts, or vice versa

6.14 200

b. § 1.168(i)–7(c), Change in grouping assets in multiple asset accounts 6.14 200

Dispositions of MACRS Property (not in a general asset account):

a. § 1.168(i)–8(c)(4), Change in determining asset disposed of 6.15 (Building or struc-tural component)

6.16 (Property other thana building or structural

component)

205

206

b. § 1.168(i)–8(f)(2) or (3), Change in determining unadjusted depreciablebasis of disposed asset in a multiple asset account or disposed portion ofan asset from one reasonable method to another reasonable method whenit is impracticable from the taxpayer’s records to determine the unadjusteddepreciable basis of disposed asset or disposed portion of asset

6.14 200

c. § 1.168(i)–8(f)(2) or (3), Change in determining unadjusted depreciablebasis of disposed asset in a multiple asset account or disposed portion ofan asset from not using to using the taxpayer’s records when it is practi-cable from the taxpayer’s records to determine the unadjusted depreciablebasis of disposed asset or disposed portion of asset

6.15 (Building or struc-tural component)


component)

205

206

d. § 1.168(i)–8(f)(2) or (3), Change in determining unadjusted depreciablebasis of disposed asset in a multiple asset account or disposed portion ofan asset from an unreasonable method to a reasonable method when it isimpracticable from the taxpayer’s records to determine the unadjusted de-preciable basis of disposed asset or disposed portion of asset



component)

205

206

May 23, 2016 Bulletin No. 2016–21916

FINAL REGULATION SECTIONSECTION # in in REV.

PROC. 2016–29

DESIGNATEDCHANGE

NUMBER (DCN)

e. § 1.168(i)–8(g), Change in method of identifying which assets in a mul-tiple asset account or portions of assets have been disposed of from onemethod to another method specified in § 1.168(i)–8(g)(1) or (2)

6.14 200

f. § 1.168(i)–8(g), Change in method of identifying which assets in a mul-tiple asset account or portions of assets have been disposed of from amethod not specified in § 1.168(i)–8(g)(1) or (2) to a method specified in§ 1.168(i)–8(g)(1) or (2)



component)

205

206

g. § 1.168(i)–8(h)(1), Change from depreciating a disposed asset or dis-posed portion of an asset to recognizing gain or loss upon dispositionwhen a taxpayer continues to depreciate the asset or portion that the tax-payer disposed of prior to the year of change



component)

205

206

h. § 1.168(i)–8(d)(2)(iii), Partial disposition election for the disposition ofa portion of an asset to which the IRS’s adjustment pertains

6.12 198

(2) Late elections or revocation of a general asset account election. The following chart summarizes the late elections under§ 1.168(i)–8 that are treated as a change in method of accounting for a limited period of time. The chart includes the revocation ofa general asset account election that also is treated as a change in method of accounting for a limited period of time.

ELECTION OR REVOCATION

TIME PERIOD FOR TREATINGELECTION OR REVOCATION AS A

METHOD CHANGE

SECTION # INREV. PROC.

2016–29, ANDDCN

General Asset Accounts:

a. Revocation of a general asset account electionmade under § 1.168(i)–1, Prop. Reg. § 1.168(i)–1,or § 1.168(1)–1T, or made under section 6.32 inthe APPENDIX of Rev. Proc. 2011–14 or section6.32 in Rev. Proc. 2015–14, as applicable

Taxable year beginning on orafter 1/1/2012 and beginning before

1/1/2015

6.11DCN 197

Late Partial Disposition Election for MACRS Property (not in a general asset account):

a. Late partial disposition election made under§ 1.168(i)–8(d)(2)(iv)(B)

First or second taxable succeeding theapplicable taxable year as defined in§ 1.168(i)–8(d)(2)(iv)

6.10DCN 196

b. Other late partial disposition elections madeunder § 1.168(i)–8(d)(2)(i)

Taxable year beginning on orafter 1/1/2012 and beginning before1/1/2015

6.10DCN 196

.19 Depreciation of fiber optic transfernode and fiber optic cable used by acable system operator (§§ 167 and 168).


to a cable system operator that is withinthe scope of Rev. Proc. 2015–12, 2015–2I.R.B. 266, and wants to change to thesafe harbor method of accounting pro-vided in section 8.03 of Rev. Proc.2015–12 for determining depreciation un-der §§ 167 and 168 of a fiber optic transfernode and trunk line consisting of fiberoptic cable used in a cable distribution

network providing one-way and two-waycommunication services. The safe harbormethod provided by section 8.03 of Rev.Proc. 2015–12 determines the asset forpurposes of §§ 167 and 168.


(i) any property that is not depreciatedunder § 168 under the taxpayer’s presentand proposed methods of accounting; or

(ii) any property that is not owned bythe taxpayer at the beginning of the yearof change.

(2) Certain eligibility rules inapplicable.

(a) The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to a taxpayerthat makes this change for its first or sec-ond taxable year ending after December31, 2013.

(b) The eligibility rule in section 5.01(d)of Rev. Proc. 2015–13 does not apply to ataxpayer that makes this change.

(3) Concurrent automatic change.(a) A taxpayer that wants to make this

change for more than one asset for thesame year of change should file a singleForm 3115 for all such assets and provide

Bulletin No. 2016–21 May 23, 2016917

a single net § 481(a) adjustment for all thechanges included in that Form 3115. Ifone or more of the changes in that singleForm 3115 generate a negative § 481(a)adjustment and other changes in that sameForm 3115 generate a positive § 481(a)adjustment, the taxpayer may provide asingle negative § 481(a) adjustment for allthe changes that are included in that Form3115 generating such adjustment and asingle positive § 481(a) adjustment for allthe changes that are included in that Form3115 generating such adjustment.

(b) A taxpayer that wants to make boththis change and a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure, asapplicable, for the same year of changeshould file a single Form 3115 for all suchchanges and must enter the designatedautomatic accounting method changenumbers for the changes on the appropri-ate line on the Form 3115. See section6.03(1)(b) of Rev. Proc. 2015–13 for in-formation on making concurrent changes.



.20 Revocation of partial dispositionelection under the remodel-refresh safeharbor described in Rev. Proc. 2015–56.


to a qualified taxpayer as defined in sec-tion 4.01 of Rev. Proc. 2015–56, 2015–49I.R.B. 827, and that is within the scope ofRev. Proc. 2015–56 and wants to revoke apartial disposition election, as provided insection 5.02(4)(b)(ii)(B) of Rev. Proc.2015–56, related to a qualified building,as defined in section 4.02 of Rev. Proc.2015–56, for which the qualified taxpayeruses the remodel-refresh safe harbormethod of accounting provided in section5.02 of Rev. Proc. 2015–56. See section11.10 of this revenue procedure for mak-ing a change to this safe harbor method ofaccounting.

(b) Inapplicability. This change doesnot apply to a qualified taxpayer, as de-scribed in section 6.20(1)(a) of this reve-nue procedure, that makes the revocationof the partial disposition specified in sec-tion 6.20(1)(a) of this revenue procedurebefore or after the time specified in sec-tion 6.20(3) of this revenue procedure.Any such revocation is not a change inmethod of accounting pursuant to§ 1.446–1(e)(2)(ii)(d)(3)(iii).

(2) Change in method of accounting.The IRS will treat the revocation of thepartial disposition election specified insection 6.20(1)(a) of this revenue proce-dure as a change in method of accountingonly for the time specified in section6.20(3) of this revenue procedure.

(3) Time for making the change. Thechange under this section 6.20 must bemade by a qualified taxpayer for any tax-able year beginning after December 31,2013, and ending before December 31,2016.


(a) In general. The eligibility rules insections 5.01(1)(d) and (f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, do not applyto a qualified taxpayer making this changefor any taxable year beginning after De-cember 31, 2013, and ending before De-cember 31, 2016.

(b) Concurrent automatic change. If aqualified taxpayer makes both a changeunder this section 6.20 and a change undersection 11.10 of this revenue procedurefor any taxable year beginning after De-cember 31, 2013, and ending before De-cember 31, 2016, on a single Form 3115for the same asset for the same year ofchange in accordance with section6.20(7)(b), the eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply to the qualified taxpayer foreither change.

(5) Section 481(a) adjustment period.A qualified taxpayer making this changemust take the entire § 481(a) adjustmentinto account in computing taxable incomefor the year of change.

(6) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, maycomplete only the following informationon Form 3115 (Rev. December 2015):



(c) Part I, line 1(a);(d) Part II, all lines except lines 5, 13,

15, 16, 17, and 19;(e) Part IV, lines 25, 26, and 27; and(f) Schedule E.(7) Concurrent automatic change.(a) A qualified taxpayer making this

change for more than one asset for thesame year of change should file a singleForm 3115 for all such assets. The singleForm 3115 must provide a single net§ 481(a) adjustment for all such changes.

(b) A qualified taxpayer making thischange and a change under section 11.10 ofthis revenue procedure for the same year ofchange should file a single Form 3115 forboth changes and must enter the designatedautomatic accounting method change num-bers for the changes on the appropriate lineon the Form 3115. See section 6.03(1)(b) ofRev. Proc. 2015–13 for information onmaking concurrent changes.



SECTION 7. RESEARCH ANDEXPERIMENTAL EXPENDITURES(§ 174)

.01 Changes to a different method ordifferent amortization period.

(1) Description of change.(a) This change applies to a taxpayer

that wants to change the treatment of ex-penditures that qualify as research andexperimental expenditures under § 174.

(b) Section 174 and the regulationsthereunder provide the specific rules forchanging a method of accounting under§ 174 for research and experimental ex-penditures. Under § 174, a taxpayer maytreat research and experimental expendi-tures that are paid or incurred by the tax-payer during the taxable year in connec-tion with the taxpayer’s trade or business

May 23, 2016 Bulletin No. 2016–21918

as expenses under § 174(a) or as deferredexpenses amortizable ratably over a pe-riod of not less than 60 months under§ 174(b). Pursuant to § 1.174–1, researchand experimental expenditures that are nottreated as expenses or deferred expensesunder § 174 must be treated as a charge tocapital account. Further, § 1.174–1 pro-vides that the expenditures to which § 174applies may relate either to a general re-search program or to a particular project.Finally, §§ 1.174–3(a) and 1.174–4(a)(5)provide that in no event will a taxpayer bepermitted to apply one method as to partof the expenditures relative to a particularproject and apply a different method to thebalance of the expenditures relating to thesame project for the same taxable year.

(c) If a taxpayer has not treated re-search and experimental expenditures asexpenses under § 174(a), § 174(a)(2)(B)and § 1.174–3(b)(2) provide that the tax-payer may, with consent, adopt the ex-pense method at any time.

(d) If a taxpayer has treated researchand experimental expenditures as ex-penses under § 174(a), § 174(a)(3) and§ 1.174–3(b)(3) provide that the taxpayermay, with consent, change to a differentmethod of treating research and experi-mental expenditures.

(e) If a taxpayer has treated researchand experimental expenditures as deferredexpenses under § 174(b), § 174(b)(2) and§ 1.174–4(b)(2) provide that the taxpayermay, with consent, change to a differentmethod of treating research or experimen-tal expenditures or to a different period ofamortization for deferred expenses.

(2) Applicability.(a) In general. This change applies to

any taxpayer that is changing:(i) from treating research and experi-

mental expenditures for a particular proj-ect or projects as expenses under § 174(a)to treating such expenditures as deferredexpenses under § 174(b), or vice versa;

(ii) to a different period of amortizationfor research and experimental expendi-tures for a particular project or projectsthat are being treated as deferred expensesunder § 174(b);

(iii) from treating research and experi-mental expenditures for a particular proj-ect or projects as expenses under § 174(a)or deferred expenses under § 174(b) to

treating such expenditures as a charge tocapital account, or vice versa; or

(iv) from treating research and experi-mental expenditures under any provisionof the Code other than § 174 to treatingsuch expenditures under § 174 and theregulations thereunder.


(i) a change in the treatment of com-puter software costs under Rev. Proc.2000–50, 2000–1 C.B. 601, as modifiedby Rev. Proc. 2007–16, 2007–1 C.B. 358(but see section 9 of this revenue proce-dure for making that change); or

(ii) a change in the treatment of Year2000 costs under Rev. Proc. 97–50,1997–2 C.B. 525.

(3) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, is not applicable to thischange.

(4) Manner of making change.(a) This change is made on a cut-off

basis and applies to all research and ex-perimental expenditures paid or incurredfor a particular project or projects on orafter the beginning of the year of change.See § 174(b)(2), and §§ 1.174–3(a),1.174–3(b)(2), and 1.174–4(a)(5) formore information regarding a cut-off ba-sis. Accordingly, a § 481(a) adjustment isneither permitted nor required.

(b) The requirement under §§ 1.174–3(b)(2), 1.174–3(b)(3), and 1.174–4(b)(2) to file an application (that is, aForm 3115) no later than the end of thefirst taxable year in which the differentmethod or different amortization period isto be used is waived for this change. How-ever, see section 6.03 of Rev. Proc.2015–13 for filing requirements applica-ble to a change under this section 7.01.

(c) The consent granted under section 9of Rev. Proc. 2015–13 satisfies the consentrequired under §§ 174(a)(2)(B), 174(a)(3),and 174(b)(2), and §§ 1.174–3(b)(2),1.174–3(b)(3), and 1.174–4(b)(2).

(5) Additional requirement. A taxpayermust attach to its Form 3115 a writtenstatement providing:

(a) the information required in§ 1.174–3(b)(2) if the taxpayer is chang-ing to treating research and experimentalexpenditures as expenses under § 174(a);

(b) the information required in § 1.174–3(b)(3) if the taxpayer is changing fromtreating research and experimental expendi-tures as expenses under § 174(a); or

(c) the information required in§ 1.174–4(b)(2) if the taxpayer is chang-ing from treating research and experimen-tal expenditures as deferred expenses un-der § 174(b) or is changing to a differentperiod of amortization for research andexperimental expenditures being treatedas deferred expenses under § 174(b).




SECTION 8. ELECTIVE EXPENSINGPROVISIONS (§ 179D)

.01 Deduction for Energy EfficientCommercial Buildings (§ 179D).

(1) Description of change. Thischange, as described in Rev. Proc. 2012–39, 2012–41 I.R.B. 470, applies to a tax-payer that wants to change its method ofaccounting to deduct under § 179Damounts paid or incurred for the installa-tion of energy efficient commercial build-ing property, as defined in § 179D(c)(1).The deduction for energy efficient com-mercial building property is subject to thelimits of § 179D(b) and must be claimedin the taxable year in which the property isplaced in service. The basis of the energyefficient commercial building property isreduced by the amount of the § 179Ddeduction taken and the remaining basisof the energy efficient commercial build-ing property is depreciated over its recov-ery period.

(2) Applicability. This change appliesto a taxpayer that places in service prop-erty for which a deduction is allowed un-der § 179D(a).

(3) Inapplicability. This change doesnot apply to a designer to whom the owner

Bulletin No. 2016–21 May 23, 2016919

of a government building allocates the§ 179D deduction.

(4) Manner of making change. A tax-payer making this change must attach toits Form 3115 (the original, the copy filedat Covington, KY, and any additional cop-ies) a statement with a detailed descriptionof the tax treatment of the property underthe taxpayer’s present and proposed meth-ods of accounting.

(5) Certification requirement. In addi-tion to the statement required by section8.01(4) of this revenue procedure, a tax-payer making this change must attach toits Form 3115 a certification as requiredby section 4 of Notice 2006–52, 2006–1C.B. 1175, or section 5 of Notice 2008–40, 2008–1 C.B. 725, to demonstrate thatthe energy efficient commercial buildingproperty has achieved the reduction in en-ergy and power costs or in lighting powerdensity necessary to qualify for the§ 179D deduction.

(6) No ruling on qualification. Theconsent granted under section 9 of Rev.Proc. 2015–13, 2015–5 I.R.B. 419, for achange provided in this section 8.01 is nota determination by the Commissioner thatthe taxpayer qualifies for a deduction un-der section 179D. The director will ascer-tain whether the taxpayer qualifies for adeduction under section 179D (includinga review of the required certifications).See section 12 of Rev. Proc. 2015–13.


(8) Contact information. For further in-formation regarding a change under thissection, contact Jennifer Bernardini at(202) 317-6853 (not a toll-free call).

SECTION 9. COMPUTER SOFTWAREEXPENDITURES (§§ 162, 167, and197)

.01 Computer software expenditures.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for the costs ofcomputer software to a method describedin Rev. Proc. 2000–50, 2000–1 C.B. 601,as modified by Rev. Proc. 2007–16,2007–1 C.B. 358. Section 5 of Rev. Proc.2000–50 describes the methods applica-

ble to the costs of developing computersoftware. Section 6 of Rev. Proc.2000–50 describes the method applicableto the costs of acquired computer soft-ware. Section 7 of Rev. Proc. 2000–50describes the method applicable to leasedor licensed computer software.

(2) Scope. This change applies to allcosts of computer software as defined insection 2 of Rev. Proc. 2000–50. How-ever, this change does not apply to anycomputer software that is subject to amor-tization as an “amortizable section 197intangible” as defined in § 197(c) and theregulations thereunder, or to costs that ataxpayer has treated as research and ex-perimentation expenditures under § 174.

(3) Statement required. If a taxpayer ischanging to the method described in sec-tion 5.01(2) of Rev. Proc. 2000–50, thetaxpayer must attach to its Form 3115 astatement providing the information re-quired in section 8.02(2) of Rev. Proc.2000–50.



SECTION 10. START-UPEXPENDITURES (§ 195)

.01 Start-up expenditures.


to a taxpayer that wants to change itsmethod of accounting under § 195 tochange:

(i) the characterization of an item as astart-up expenditure; or

(ii) the determination of the taxableyear in which the taxpayer’s active tradeor business to which the start-up expendi-tures relate begins.


(i) start-up expenditures paid or in-curred before October 23, 2004; or

(ii) start-up expenditures paid or in-curred after October 22, 2004, and beforeAugust 17, 2011, if the period of limita-tions on assessment of tax for the taxable

year the election under § 1.195–1(b) isdeemed made has expired.

(2) No rulings.(a) Characterization of item. The con-

sent granted under section 9 of Rev. Proc.2015–13 for a change specified in section10.01(1)(a)(i) of this revenue procedure isnot a determination by the Commissionerthat the taxpayer has properly character-ized an item as a start-up expenditure anddoes not create any presumption that theproposed characterization of an item as astart-up expenditure is permissible under§ 195(c)(1). The director will ascertainwhether the taxpayer’s characterization ofan item as a start-up expenditure is per-missible.

(b) When active trade or business be-gins. The consent granted under section 9of Rev. Proc. 2015–13 for a change spec-ified in section 10.01(1)(a)(ii) of this rev-enue procedure is not a determination bythe Commissioner that the taxpayer hasproperly determined the taxable year inwhich the taxpayer’s active trade or busi-ness to which the start-up expendituresrelate begins and does not create any pre-sumption that the proposed taxable year inwhich the taxpayer’s active trade or busi-ness to which the start-up expendituresrelate begins is permissible under§ 195(c)(2). The director will ascertainwhether the taxpayer’s determination ofthe taxable year in which the taxpayer’sactive trade or business to which thestart-up expenditures relate begins is per-missible.

(3) Designated automatic accountingmethod change number. The designatedaccounting method change number for achange to a method of accounting underthis section 10.01 is “223.”

(4) Contact information. For further in-formation regarding a change under thissection, contact Elizabeth Binder at (202)317-7005 (not a toll-free number).

SECTION 11. CAPITALEXPENDITURES (§ 263)

.01 Package design costs.


to a taxpayer that wants to change itsmethod of accounting for package designcosts that are within the scope of Rev.Proc. 97–35, 1997–2 C.B. 448, as modi-

May 23, 2016 Bulletin No. 2016–21920

fied by Rev. Proc. 98–39, 1998–1 C.B.1320, to one of the three alternative meth-ods of accounting for package designcosts described in section 5 of Rev. Proc.97–35, which are: (i) the capitalizationmethod, (ii) the design-by-design capital-ization and 60-month amortizationmethod, and (iii) the pool-of-cost capital-ization and 48-month amortizationmethod.

(b) Inapplicability. This change doesnot apply to a taxpayer that wants tochange to the capitalization method forcosts of developing or modifying anypackage design that has an ascertainableuseful life.

(2) Additional requirements. If a tax-payer is changing its method of account-ing for package design costs to the capi-talization method or the design-by-designcapitalization and 60-month amortizationmethod, the taxpayer must attach a state-ment to its timely filed Form 3115. Thestatement must provide a description of eachpackage design, the date on which each wasplaced in service, and the cost basis of each(as determined under sections 5.01(2) or5.02(2) of Rev. Proc. 97–35).


(4) Contact information. For further in-formation regarding a change under thissection, contact Jason Kristall at (202)317-7003 (not a toll-free call).

.02 Line pack gas or cushion gas.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for line pack gasor cushion gas to a method consistent withthe holding in Rev. Rul. 97–54, 1997–2C.B. 23. Rev. Rul. 97–54 holds that thecost of line pack gas or cushion gas is acapital expenditure under § 263, the costof recoverable line pack gas or recover-able cushion gas is not depreciable, andthe cost of unrecoverable line pack gas orunrecoverable cushion gas is depreciableunder §§ 167 and 168.

(2) Additional requirements. A tax-payer that changes its method of account-ing for unrecoverable line pack gas orunrecoverable cushion gas under this sec-tion 11.02 must change to a permissible

method of accounting for depreciation forthe cost of that gas as part of this change.



.03 Removal costs.


to a taxpayer that wants to change itsmethod of accounting for certain costs inthe retirement and removal of a deprecia-ble asset to conform with Rev. Rul.2000–7, 2000–1 C.B. 712, as modified bythis revenue procedure, or for removalcosts in disposal of a depreciable asset,including a partial disposition, as de-scribed under § 1.263(a)–3(g)(2)(i).

(b) Inapplicability. This change doesnot apply to a taxpayer that wants tochange its method of accounting for re-moval costs in the disposal of a compo-nent of a unit of property where the dis-posal of the component is not adisposition for federal tax purposes. Tomake that change, see section 11.08 ofthis revenue procedure.

(c) Manner of making change. A qual-ified small taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015):



(iii) Part I, line 1(a);(iv) Part II, all lines except lines 13, 15,

16, 17, and 19, if the change is not todepreciating property;

(v) Part II, all lines except lines 13,15b, 16, 17, and 19, if the change is todepreciating property;

(vi) Part IV, lines 26 and 27; and(vii) Schedule E, if applicable.(2) Additional requirements.(a) Except for assets for which depre-

ciation is determined in accordance with§ 1.167(a)–11 (ADR), the taxpayer’s pro-posed method of treating removal costs

for assets accounted for in a multiple assetaccount must be consistent with the tax-payer’s method of treating salvage pro-ceeds. See Rev. Rul. 74–455, 1974–2C.B. 63. (See section 6.02 of this revenueprocedure for changing a taxpayer’s pres-ent method of treating salvage proceeds.)

(b) If this change involves assets thatare public utility property within themeaning of § 168(i)(10) or former§ 167(l)(3)(A), the taxpayer must complywith the terms and conditions in section6.01(3)(b)(v) of this revenue procedure.




.04 Distributor commissions.


to a taxpayer that wants to change fromcurrently deducting distributor commis-sions (as defined by section 2 of Rev.Proc. 2000–38, 2002–2 C.B. 310, as mod-ified by Rev. Proc. 2007–16, 2007–1 C.B.358) to a method of capitalizing and am-ortizing distributor commissions using thedistribution fee period method, the 5-yearmethod, or the useful life method (all de-scribed in Rev. Proc. 2000–38).

(b) Inapplicability. This change doesnot apply to an amortizable section 197intangible (including any property forwhich a timely election under§ 13261(g)(2) of the Revenue Reconcili-ation Act of 1993, 1993–3 C.B. 1, 128,was made).

(2) Manner of making change. Thischange is made on a cut-off basis andapplies only to distributor commissionspaid or incurred on or after the beginningof the year of change. Accordingly, a§ 481(a) adjustment is neither permittednor required.


Bulletin No. 2016–21 May 23, 2016921



.05 Intangibles.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits treatment of an item to a method ofaccounting permitted by §§ 1.263(a)–4,1.263(a)–5, and 1.167(a)–3(b). See Rev.Proc. 2006–12, 2006–1 C.B. 310, asmodified by Rev. Proc. 2006–37, 2006–2C.B. 499, for the specific requirements,information, and documentation requiredfor this change.

(2) Section 481(a) adjustment. In com-puting the § 481(a) adjustment for thischange, the taxpayer takes into accountonly amounts paid or incurred in taxableyears ending on or after January 24, 2002.See section 5 of Rev. Proc. 2006–12 fordetailed rules for computing the § 481(a)adjustment and reporting it on Form 3115.



.06 Rotable spare parts safe harbormethod.

(1) Description of change. This changeapplies to a taxpayer that maintains a poolor pools of rotable spare parts that areprimarily used to repair customer-owned(or customer-leased) equipment underwarranty or maintenance agreements, andwants to change its method of accountingfor the rotable spare parts to the safe har-bor method of accounting provided inRev. Proc. 2007–48, 2007–2 C.B. 110.The taxpayer must meet the requirementsin section 4.01 of Rev. Proc. 2007–48 touse this safe harbor method of accounting.

(2) Change from safe harbor method.A taxpayer that is required to change itsmethod of accounting from the safe har-bor method under section 5.06 of Rev.Proc. 2007–48, must make the change

under section 21.09 of this revenue pro-cedure.



.07 Repairable and reusable spare parts.


to a taxpayer that wants to change itsmethod of accounting to treat repairableand reusable spare parts as depreciableproperty to conform with the holdings inRev. Rul. 69–200, 1969–1 C.B. 60, andRev. Rul. 69–201, 1969–1 C.B. 60. Thischange applies to repairable and reusablespare parts that: are owned by the tax-payer at the beginning of the year ofchange; are used to repair equipmentowned by the taxpayer; are acquired bythe taxpayer for a specific type of equip-ment at the time that the related equip-ment is acquired; usually have the sameuseful life as the related equipment; andhave been placed in service by the tax-payer after 1986. A taxpayer making achange in method of accounting under thissection 11.07 may treat its repairable andreusable spare parts as tangible propertyfor which depreciation is allowable at thetime that the related equipment is placedin service by the taxpayer. The method ofcomputing depreciation for the repairableand reusable spare parts is the samemethod of computing depreciation for therelated equipment.


(i) A taxpayer that is currently capital-izing and depreciating the cost of its re-pairable and reusable spare parts, or that iscurrently capitalizing the cost of its repair-able and reusable spare parts and treatingthese parts as nondepreciable property(but see section 6.01 of this revenue pro-cedure for making a change from an im-permissible to a permissible method ofaccounting for depreciation);

(ii) A taxpayer that is using an imper-missible method of accounting for depre-ciation for the related equipment for

which the repairable and reusable spareparts are acquired, unless the taxpayerconcurrently changes its method to use apermissible method of accounting for de-preciation under section 6 of this revenueprocedure;

(iii) A repairable and reusable sparepart that meets the definition of rotablespare parts, temporary spare parts, orstandby emergency spare parts in § 1.162–3(c)(2) or (3), for which the cost was paidor incurred by the taxpayer in a taxableyear beginning on or after January 1, 2014(or in a taxable year beginning on or afterJanuary 1, 2012, if the taxpayer chooses toapply § 1.162–3 to amounts paid or in-curred in those taxable years), and forwhich the taxpayer did not make the elec-tion under § 1.162–3(d) to capitalize anddepreciate such repairable and reusablespare part; or

(iv) a taxpayer that chooses to apply§ 1.162–3T to a repairable and reusablespare part that meets the definition of ro-table spare parts or temporary spare partsin § 1.162–3T(c)(2), for which the costwas paid or incurred by the taxpayer in ataxable year beginning on or after January1, 2012, and before January 1, 2014, andfor which the taxpayer did not make theelection under § 1.162–3T(d) to capitalizeand depreciate such repairable and reus-able spare part.

(2) Additional requirements.(a) To change a method of accounting

under this section 11.07, a taxpayer (in-cluding a qualified small taxpayer as de-fined in section 6.01(4)(b) of this revenueprocedure) must complete Schedule E ofForm 3115 for the repairable and reusablespare parts and also attach the followinginformation to the completed Form 3115:

(i) A description of the repairable andreusable spare parts;

(ii) A list of related equipment forwhich the repairable and reusable spareparts are acquired; and

(iii) A complete description of themethod of computing depreciation (forexample, depreciation method, recoveryperiod, convention, and applicable assetclass under Rev. Proc. 87–56, 1987–2C.B. 674, as clarified and modified byRev. Proc. 88–22, 1988–1 C.B. 785) thatthe taxpayer uses for the related equip-ment for which the repairable and reus-able spare parts are acquired.

May 23, 2016 Bulletin No. 2016–21922

(b) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015):




15b, 16, 17, and 19; and(v) Part IV, all lines except line 25.(3) Concurrent automatic change.(a) A taxpayer making both this change

and a change to a UNICAP method undersection 12.01, 12.02, 12.08, or 12.12 ofthis revenue procedure (as applicable) forthe same year of change should file asingle Form 3115 for both changes, inwhich case the taxpayer must enter thedesignated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, for information onmaking concurrent changes. For example,a qualified small taxpayer, as defined insection 6.01(4)(b) of this revenue proce-dure, must include on the single Form3115 the information required by section11.07(2)(b) of this revenue procedure andthe information required by the lines onForm 3115, applicable to the UNICAPmethod change, including Part II line 14and 15, Part IV, and Schedule D, and mustinclude a separate response to each line onForm 3115 that is applicable to bothchanges (such as Part II lines 6b, 7, 8b, 14,and, as applicable for this change, Part IV)for which the taxpayer’s response is dif-ferent for this change and the change to aUNICAP method.

(b) A taxpayer making both thischange and a change to a permissiblemethod of accounting for depreciation forrepairable and reusable spare parts, or forthe related equipment for which the re-pairable and reusable spare parts are ac-quired, under section 6 of this revenueprocedure (as applicable) for the sameyear of change should file a single Form3115 for both changes, in which case thetaxpayer must enter the designated auto-matic accounting method change numbers

for both changes on the appropriate lineon that Form 3115. See section 6.03(1)(b)of Rev. Proc. 2015–13 for information onmaking concurrent changes. For example,a qualified small taxpayer must include onthe single Form 3115 the information re-quired to be completed on Form 3115 bya qualified small taxpayer under this rev-enue procedure for each change in methodof accounting included on that Form 3115.

(c) A taxpayer making this change alsomay establish pools for the repairable andreusable spare parts or may identify dis-posed repairable and reusable spare partsin accordance with section 6.14 of thisrevenue procedure. A taxpayer makingboth this change and the change undersection 6.14 of this revenue procedure forthe same year of change should file asingle Form 3115 for both changes, inwhich case the taxpayer must enter thedesignated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13for information on making concurrentchanges. For example, a qualified smalltaxpayer must include on the single Form3115 the information required to be com-pleted on Form 3115 by a qualified smalltaxpayer under this revenue procedure foreach change in method of accounting in-cluded on that Form 3115.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section11.07 is “121”.


.08 Tangible property.


scribed in Rev. Proc. 2014–16, 2014–9I.R.B. 606, applies to a taxpayer thatwants to make a change to a method ofaccounting specified in section 11.08(3) ofthis revenue procedure and permitted un-der:

(i) Section 1.162–3, § 1.162–4,§ 1.263(a)–1, § 1.263(a)–2, or§ 1.263(a)–3 (the final tangible propertyregulations) for taxable years beginningon or after January 1, 2012; or

(ii) Section 1.446–1(e)(2)(ii)(d)(2) ifthe property for which the taxpayer isotherwise changing its method of account-ing under this section is depreciable undereither the present or the proposed methodof accounting.


(i) A taxpayer that wants to change itsmethod of accounting for dispositions ofdepreciable property, including a changein the asset disposed of (but see sections6.10, 6.11, 6.12, 6.15, 6.16, and 6.17 ofthis revenue procedure);

(ii) Amounts paid or incurred for cer-tain materials and supplies that the tax-payer has elected to capitalize and depre-ciate under § 1.162–3(d);

(iii) Amounts paid or incurred to whichthe taxpayer has elected to apply the deminimis safe harbor under § 1.263(a)–1(f);

(iv) Amounts paid or incurred for em-ployee compensation or overhead that thetaxpayer has elected to capitalize under§ 1.263(a)–2(f)(2)(iv)(B);

(v) Amounts paid or incurred to whichthe taxpayer has elected to apply the safeharbor for small taxpayers under§ 1.263(a)–3(h);

(vi) Amounts paid or incurred for re-pair and maintenance costs that the tax-payer has elected to capitalize under§ 1.263(a)–3(n);

(vii) Amounts paid or incurred to facil-itate the acquisition or disposition of as-sets that constitute a trade or business (butsee section 10.05 of this revenue proce-dure); or

(viii) Amounts paid or incurred for re-pair and maintenance costs that the tax-payer is changing from capitalizing to de-ducting and for which the taxpayer hasclaimed a federal income tax credit orelected to apply § 168(k)(4).

(2) Certain eligibility rules temporarilyinapplicable.

(a) In general. The eligibility rules insections 5.01(1)(d) and (f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, do not applyto a taxpayer that makes one or morechanges in method of accounting underthis section for any taxable year beginningbefore January 1, 2016.

(b) Concurrent automatic change. Ifthe taxpayer makes both a change underthis section 11.08 and a change to a UNI-

Bulletin No. 2016–21 May 23, 2016923

CAP method under section 12.01, 12.02,12.08, or 12.12 of this revenue procedure(as applicable) for any taxable year begin-ning before January 1, 2016, on a singleForm 3115 for the same year of change inaccordance with section 11.08(5) of thisrevenue procedure, the eligibility rules insections 5.01(1)(d) and (f) of Rev. Proc.2015–13 do not apply to the taxpayer foreither change. See section 6.03(1)(b) ofRev. Proc. 2015–13 for information onmaking concurrent changes.

(3) Covered changes. This section11.08 only applies to the followingchanges in methods of accounting:

(a) A change to deducting amountspaid or incurred to acquire or producenon-incidental materials and supplies inthe taxable year in which they are firstused in the taxpayer’s operations or con-sumed in the taxpayer’s operations in ac-cordance with §§ 1.162–3(a)(1) and1.162–3(c)(1);

(b) A change to deducting amounts toacquire or produce incidental materialsand supplies in the taxable year in whichpaid or incurred in accordance with§§ 1.162–3(a)(2) and 1.162–3(c)(1);

(c) A change to deducting amountspaid or incurred to acquire or producenon-incidental rotable and temporaryspare parts in the taxable year which thetaxpayer disposes of the parts in accor-dance with §§ 1.162–3(a)(3) and 1.162–3(c)(2);

(d) A change to the optional method ofaccounting for rotable and temporaryspare parts in accordance with § 1.162–3(e);

(e) A change to deducting amountspaid or incurred for repair and mainte-nance in accordance with § 1.162–4, in-cluding a change, if any, in identifying theunit of property under § 1.263(a)–3(e) or,in the case of a building, identifying thebuilding structure or building systems un-der § 1.263(a)–3(e)(2) for purposes ofmaking the change to deducting theamounts;

(f) A change to capitalizing amountspaid or incurred for improvements to tan-gible property in accordance with§ 1.263(a)–3 and, if depreciable, to depre-ciating such property under § 167 or§ 168, including a change, if any, in iden-tifying the unit of property under§ 1.263(a)–3(e) or, in the case of a build-

ing, identifying the building structure orbuilding systems under § 1.263(a)–3(e)(2)for purposes of making the change to cap-italizing the amounts;

(g) A change by a dealer in property todeduct amounts paid or incurred for com-missions and other costs that facilitate thesale of property in accordance with§ 1.263(a)–1(e)(2);

(h) A change by a non-dealer in prop-erty to capitalizing amounts paid or in-curred for commissions and other coststhat facilitate the sale of property in ac-cordance with § 1.263(a)–1(e);

(i) A change to capitalizing amountspaid or incurred to acquire or produceproperty in accordance with § 1.263(a)–2,and if depreciable, to depreciating suchproperty under § 167 or § 168;

(j) A change to deducting amounts paidor incurred in the process of investigatingor otherwise pursuing the acquisition ofreal property if the amounts meet the re-quirements of § 1.263(a)–2(f)(2)(iii); and

(k) A change to the optional regulatoryaccounting method in accordance with§ 1.263(a)–3(m) to determine whetheramounts paid or incurred to repair, main-tain, or improve tangible property aretreated as deductible expenses or capitalexpenditures.

(4) Manner of making change.(a) Form 3115. In addition to the other

information required on line 14 of Form3115, the taxpayer must include the fol-lowing:

(i) The citation to the paragraph of thefinal tangible property regulations thatprovides for the proposed method, ormethods, of accounting to which the tax-payer is changing (for example, § 1.162–3(a), § 1.263(a)–3(i), § 1.263(a)–3(k));and

(ii) If the taxpayer is changing anyunit(s) of property under § 1.263(a)–3(e)or, in the case of a building, is changingthe identification of any building struc-ture(s) or building system(s) under§ 1.263–3(e)(2) for purposes of determin-ing whether amounts are deducted as re-pair and maintenance costs under section§ 1.162–4 or capitalized as improvementcosts under § 1.263(a)–3, the taxpayermust include a detailed description of theunit(s) of property, building structure(s),or buildings system(s) used under its pres-ent method of accounting and a detailed

description of the unit(s) of property,building structure(s), and building sys-tem(s) under its proposed method of ac-counting, together with a citation to theparagraph of the final tangible propertyregulations under which the unit of prop-erty is permitted.

(iii) A taxpayer changing its method ofaccounting under this section 11.08 tocapitalizing amounts paid or incurred andto depreciating such property under § 167or § 168, as applicable, must completeSchedule E of Form 3115.

(b) Reduced filing requirement forqualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure, isrequired to complete only the followinginformation on Form 3115 (Rev. Decem-ber 2015):



(iii) Part I, line 1(a);(iv) Part II, all lines except lines 13, 15,

16, 17, and 19, if the change is to notdepreciating property;

(v) Part II, all lines except line 13, line15b, 16, 17, and 19, if the change is todepreciating property;

(vi) Part IV, lines 26 and 27; and(vii) Schedule E, if applicable.(5) Concurrent automatic change.(a) A taxpayer making two or more

changes in method of accounting pursuantto this section 11.08 should file a singleForm 3115 for all of these changes andmust enter the designated automatic ac-counting method change numbers for allof these changes on the appropriate lineon the Form 3115.

(b) A taxpayer making both one ormore changes in method of accountingpursuant to this section 11.08 and achange to a UNICAP method under sec-tion 12 of this revenue procedure (as ap-plicable) for the same year of changeshould file a single Form 3115 that in-cludes all of these changes and must enterthe designated automatic accountingmethod change numbers for all of thesechanges on the appropriate line on thatForm 3115. See section 6.03(1)(b) of Rev.Proc. 2015–13 for information on makingconcurrent changes. For example, a qual-ified small taxpayer, as defined in section

May 23, 2016 Bulletin No. 2016–21924

6.01(4)(b) of this revenue procedure, mustinclude on the single Form 3115 the in-formation required by section 11.08(4)(b)of this revenue procedure for this changeand the information required by the lineson Form 3115, applicable to the UNICAPmethod change, including Part II lines 14 and15, Part IV, and Schedule D, and must includea separate response to each line on Form 3115that is applicable to both changes (such as PartII lines 6b, 7, 8b, 14, and, as applicable for thischange, Part IV) for which the taxpayer’s re-sponse is different for this change and thechange to a UNICAP method.

(6) Section 481(a) adjustment.(a) In general. Except as provided in

section 11.08(6)(b) of this revenue proce-dure, a taxpayer changing to a method ofaccounting provided in this section 11.08must apply § 481(a) and take into accountany applicable § 481(a) adjustment in themanner provided in section 7.03 of Rev.Proc. 2015–13.

(b) Limited adjustment for certainchanges.

(i) Final tangible property regulations.A taxpayer changing to a method of ac-counting under § 1.162–3 (except§ 1.162–3(e)), § 1.263(a)–2(f)(2)(iii),§ 1.263(a)–2(f)(3)(ii), § 1.263(a)–3(m),§ 1.263A–1(e)(2)(i)(A), and § 1.263A–1(e)(3)(ii)(E) is required to calculate a§ 481(a) adjustment as of the first day ofthe taxpayer’s taxable year of change thattakes into account only amounts paid orincurred in taxable years beginning on orafter January 1, 2014. Optionally, a tax-payer may take into account amounts paidor incurred in taxable years beginning onor after January 1, 2012.

(ii) Small business exception. A tax-payer that met the scope requirements ofsection 4 of Rev. Proc. 2015–20, 2015–9I.R.B. 694, and that changed its method ofaccounting under section 10.11(3)(a) ofRev. Proc. 2015–14 (which is now section11.08(3) of this revenue procedure) byfollowing section 5 of Rev. Proc. 2015–20is required to calculate a § 481(a) adjust-ment as of the first day of the year ofchange that takes into account onlyamounts paid or incurred in taxable yearsbeginning on or after January 1, 2014.

(c) Itemized listing on Form 3115. Ataxpayer changing to a method of ac-counting provided in this section 11.08must include on Form 3115 (Rev. Decem-ber 2015), Part IV, line 26, the total§ 481(a) adjustment for each change inmethod of accounting being made. If thetaxpayer is making more than one changein method of accounting under the finaltangible property regulations, the taxpayer(including a qualified small taxpayer)must include on an attachment to Form3115:

(i) The information required by PartIV, line 26 of Form 3115 (Rev. December2015) for each change in method of ac-counting (including the amount of the§ 481(a) adjustment for each change inmethod of accounting, which includes theportion of the § 481(a) adjustment attrib-utable to UNICAP);

(ii) The information required by Part II,line 14 of Form 3115 (Rev. December2015) for each change; and

(iii) The citation to the paragraph of thefinal tangible property regulations that

provides for each proposed method of ac-counting.

(d) Repair allowance property. A tax-payer changing to a method of accountingprovided by § 1.263(a)–3 under this sec-tion 11.08 must not include in the § 481(a)adjustment any amount attributable toproperty for which the taxpayer elected toapply the repair allowance under§ 1.167(a)–11(d)(2) for any taxable yearin which the repair allowance election wasmade.

(e) Statistical Sampling. Except for anychange in accounting method for which ataxpayer is required to compute a § 481(a)adjustment under section 11.08(6)(b) ofthis revenue procedure, a taxpayer chang-ing its method of accounting under thissection 11.08 may use statistical samplingin determining the § 481(a) adjustment byfollowing the guidance provided in Rev.Proc. 2011–42, 2011–37 I.R.B. 318.

(7) No audit protection. A taxpayercalculating a § 481(a) adjustment undersection 11.08(6)(b)(ii) of this revenue pro-cedure that takes into account onlyamounts paid or incurred in taxable yearsbeginning on or after January 1, 2014, doesnot receive audit protection under section8.01 of Rev. Proc. 2015–13 for amountssubject to a change under this section 11.08that are paid or incurred in taxable yearsbeginning before January 1, 2014. See sec-tion 5.02 of Rev. Proc. 2015–20.

(8) Designated automatic accountingmethod change number. See the followingtable for the designated automatic ac-counting method change numbers (DCN)for the changes in method of accountingunder this section 11.08.

(a) Changes under the final tangible property regulations.

Description of Change DCN Citation

A change to deducting amounts paid or incurred for repair and maintenance or achange to capitalizing amounts paid or incurred for improvements to tangibleproperty and, if depreciable, to depreciating such property under § 167 or § 168.Includes a change, if any, in the method of identifying the unit of property, or inthe case of a building, identifying the building structure or building systems forthe purpose of making this change.

184 §§ 1.162–4,1.263(a)–3

Change to the regulatory accounting method. 185 § 1.263(a)–3(m)

Change to deducting non-incidental materials and supplies when used or con-sumed.

186 §§ 1.162–3(a)(1),(c)(1)

Change to deducting incidental materials and supplies when paid or incurred. 187 §§ 1.162–3(a)(2),(c)(1)

Change to deducting non-incidental rotable and temporary spare parts when dis-posed of.

188 § 1.162–3(a)(3),(c)(2)

Bulletin No. 2016–21 May 23, 2016925

Description of Change DCN Citation

Change to the optional method for rotable and temporary spare parts. 189 § 1.162–3(e)

Change by a dealer in property to deduct commissions and other costs that facili-tate the sale of property.

190 § 1.263(a)–1(e)(2)

Change by a non-dealer in property to capitalizing commissions and other coststhat facilitate the sale of property.

191 § 1.263(a)–1(e)(1)

Change to capitalizing acquisition or production costs and, if depreciable, to de-preciating such property under § 167 or § 168.

192 § 1.263(a)–2

Change to deducting certain costs for investigating or pursuing the acquisition ofreal property (whether and which).

193 § 1.263(a)–2(f)(2)(iii)


.09 Railroad track structure expenditures.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for railroad trackstructures to:

(a) the safe harbor method provided inRev. Proc. 2002–65, 2002–2 C.B. 700; or

(b) the safe harbor method provided inRev. Proc. 2001–46, 2001–2 C.B. 263.


(3) Contact information. For further in-formation regarding a change under thissection, contact Charles Gorham at (202)317-7003 (not a toll-free call).

.10 Remodel-refresh safe harbor method.


to a qualified taxpayer as defined in sec-tion 4.01 of Rev. Proc. 2015–56, 2015–49I.R.B. 827, and within the scope of Rev.Proc. 2015–56 that wants to change to theremodel-refresh safe harbor method of ac-counting provided in section 5.02 of Rev.Proc. 2015–56 for its qualified costs, in-cluding the making of a late general assetaccount election as provided under section5.02(6)(d) of Rev. Proc. 2015–56.


(i) The revocation of a partial disposi-tion election that is made pursuant to sec-tion 5.02(4)(b)(ii)(B) of Rev. Proc.

2015–56 (but see section 6.20 of this rev-enue procedure for making this revoca-tion);

(ii) A change in determination of theasset disposed of described in section5.02(5) of Rev. Proc. 2015–56 (which ismade under section 6.15(3)(a) or6.17(3)(a) of this revenue procedure, asapplicable). See section 11.10(6)(b) ofthis revenue procedure for making thechange under section 6.15(3)(a) or6.17(3)(a) of this revenue procedure as aconcurrent change;

(iii) The making of a late general assetaccount election not provided under sec-tion 5.02(6)(d) of Rev. Proc. 2015–56;

(iv) If section 5.02(4)(c) of Rev. Proc.2015–56 applies to a qualified building(partial disposition election made in aprior year and the qualified taxpayer didnot revoke such election within the timeand in the manner provided in section5.02(4)(b)(ii) of Rev. Proc. 2015–56),any qualified costs paid for that quali-fied building prior to the year of changefor a Form 3115 filed to make thechange to the remodel-refresh safe har-bor method of accounting under thissection 11.10; or

(v) If section 5.02(5)(b) of Rev. Proc.2015–56 applies to a qualified building (rec-ognized gain or loss under § 1.168(i)–1T or§ 1.168(i)–8T, or in a taxable year begin-ning before January 1, 2012, for dispositionof a component of a qualified building) andthe qualified taxpayer did not make the re-quired change in method of accounting to bein accord with § 1.168(i)–1(e)(2)(viii) or§ 1.168–8(c)(4), as applicable, on or be-fore the first taxable year that the qual-ified taxpayer uses the remodel-refreshsafe harbor and take the entire amountof the § 481(a) adjustment into account

in computing the qualified taxpayer’staxable income for that year of change,any qualified costs paid for that quali-fied building prior to the first taxableyear that the qualified taxpayer or theIRS makes the change specified in sec-tion 6.15(3)(a) or 6.17(3)(a) of this rev-enue procedure, as applicable, for thatqualified building and takes into account theentire amount of the § 481(a) adjustment incomputing taxable income for the year ofchange.

(2) Certain eligibility rules inapplicable.(a) In general. The eligibility rules in

sections 5.01(1)(d) and (f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, do not ap-ply to a qualified taxpayer that changesto a method of accounting provided un-der this section 11.10 for any taxableyear beginning after December 31,2013, and ending before December 31,2016.

(b) Concurrent automatic change. If aqualified taxpayer makes both a changeunder this section 11.10 and a changeunder section 6.14(3)(b), 6.15(3)(a),and/or 6.17 of this revenue procedure forany taxable year beginning after Decem-ber 31, 2013, and ending before Decem-ber 31, 2016, on a single Form 3115 forthe same asset for the same year ofchange in accordance with section11.10(7)(b) of this revenue procedure,the eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply to the qualified taxpayer foreither change.

(3) No audit protection. If section5.02(4)(c) or 5.02(5)(b) of Rev. Proc.2015–56 applies to a qualified building(and, in the case of section 5.02(5)(b), thequalified taxpayer does not make the re-quired change on or before the first tax-

May 23, 2016 Bulletin No. 2016–21926

able year that the qualified taxpayer usesthe remodel-refresh safe harbor), the qual-ified taxpayer does not receive audit pro-tection under section 8.01 of Rev. Proc.2015–13 in connection with this changefor that qualified building. See section8.02(2) of Rev. Proc. 2015–13.

(4) Manner of making change.(a) Reduced filing requirement for

qualified small taxpayers. A qualifiedsmall taxpayer, as defined in section6.01(4)(b) of this revenue procedure,may complete only the following infor-mation on Form 3115 (Rev. December2015):



(iii) Part I, line 1(a);(iv) Part II, all lines except lines5, 13,

15, 16, 17, and 19;(v) Part IV, lines 25, 26, and 27;(vi) Schedule E; and(vii) If applicable, the election state-

ment described in section 11.10(4)(b)(ii).(b) Late general asset account election.(i) In general. If under section 5.02(6)(d)

of Rev. Proc. 2015–56 the qualified tax-payer is required to make a late general assetaccount election, the late general assetaccount election change is made using amodified cut-off method under whichthe unadjusted depreciable basis and thedepreciation reserve of the asset as ofthe beginning of the year of change areaccounted for using the new method ofaccounting. The late general asset ac-count election change requires the gen-eral asset account to include a beginningbalance for both the unadjusted depre-ciable basis and the depreciation re-serve. The beginning balance for theunadjusted depreciable basis of eachgeneral asset account is equal to the sumof the unadjusted depreciable bases as ofthe beginning of the year of change forall assets included in that general assetaccount. The beginning balance of thedepreciation reserve of each general as-set account is equal to the sum of thegreater of the depreciation allowed orallowable as of the beginning of the yearof change for all assets included in thatgeneral asset account.

(ii) Election statement. The qualifiedtaxpayer (including a qualified small tax-

payer) must attach to its Form 3115 astatement providing that the qualified tax-payer agrees to the following additionalterms and conditions:

(A) The qualified taxpayer consentsto, and agrees to apply, all of the provi-sions of § 1.168(i)–1 to the assets thatare subject to the election specified insection 5.02(6)(d) of Rev. Proc. 2015–56; and

(B) Except as provided in § 1.168(i)–1(c)(1)(iii)(A), (e)(3), (g), or (h), the elec-tion made by the qualified taxpayer undersection 5.02(6)(d) of Rev. Proc.2015–56 is irrevocable and will be bind-ing on the qualified taxpayer for com-puting taxable income for the year ofchange and for all subsequent taxableyears with respect to the assets that aresubject to this election.

(c) Cut-off method required for certainchanges.

(i) If section 5.02(4)(c) of Rev. Proc.2015–56 applies to a qualified building, thechange to the remodel-refresh safe harbormethod of accounting for that qualifiedbuilding, and any improvements to thatqualified building, is made using a cut-offmethod and applies only to qualified costspaid or incurred for that qualified building,and any improvements to that qualifiedbuilding, beginning in the year of change forthe change made to the remodel-refresh safeharbor method of accounting.

(ii) If section 5.02(5)(b) of Rev. Proc.2015–56 applies to a qualified buildingand the qualified taxpayer does notchange its present method of accountingto be in accord with § 1.168(i)–1(e)(2)(viii) or § 1.168(i)– 8(c)(4), asapplicable, on or before the first taxableyear that the qualified taxpayer used theremodel-refresh safe harbor and take theentire amount of the § 481(a) adjustmentinto account in computing the qualifiedtaxpayer’s taxable income for that yearof change, the change to the remodel-refresh safe harbor method of account-ing for that qualified building, and anyimprovements to that qualified building,is made using a cut-off method and ap-plies only to qualified costs paid or in-curred for that qualified building, andany improvements to that qualifiedbuilding, beginning in the year ofchange for the change made to complywith § 1.168(i)–1(e)(2)(viii) or

§ 1.168(i)– 8(c)(4), as applicable. Seesection 6.15(3)(a) and section 6.17(3)(a)of this revenue procedure, as applicable.

(5) Section 481(a) adjustment.(a) In general. A qualified taxpayer

changing its method of accounting underthis section 11.10 must apply § 481(a)and take into account any applicable§ 481(a) adjustment in the manner pro-vided in section 7.03 of Rev. Proc.2015–13. However, a § 481(a) adjust-ment is neither required nor permittedfor the late general asset account elec-tion under section 5.02(6)(d) of Rev.Proc. 2015–56 or, if section 5.02(4)(c)or 5.02(5)(b) of Rev. Proc. 2015–56 ap-plies to a qualified building, and an im-provement to a qualified building (and,in the case of section 5.02(5)(b) of Rev.Proc. 2015–56, the qualified taxpayerdid not make the required change on orbefore the first taxable year that thequalified taxpayer uses the remodel-refresh safe harbor), for the change tothe remodel-refresh safe harbor methodof accounting for that qualified buildingand an improvement to that qualifiedbuilding.

(b) Repair allowance property. A qual-ified taxpayer changing to the method ofaccounting provided under this section11.10 must not include in the § 481(a)adjustment any amount attributable toproperty for which the qualified taxpayerelected to apply the repair allowance un-der § 1.167(a)–11(d)(2) for any taxableyear in which the repair allowance elec-tion was made.

(c) Statistical sampling. A qualifiedtaxpayer changing its method of account-ing under this section 11.10 may use sta-tistical sampling in determining the§ 481(a) adjustment only by following thesampling procedures provided in Rev.Proc. 2011–42, 2011–37 I.R.B. 318.

(6) Concurrent automatic change.(a) A qualified taxpayer making this

change for more than one asset for thesame year of change should file a singleForm 3115 for all such assets. The sin-gle Form 3115 must provide a single net§ 481(a) adjustment for all suchchanges.

(b) A qualified taxpayer making thischange, a change under section 6.15(3)(a)or 6.20 of this revenue procedure, and anychange listed in section 6.14(3)(b) or sec-

Bulletin No. 2016–21 May 23, 2016927

tion 6.17 of this revenue procedure for thesame year of change should file a singleForm 3115 for all such changes and mustenter the designated automatic accountingmethod change numbers for the changeson the appropriate line on the Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes.

(7) Designated automatic accountingmethod change number. The designated au-tomatic accounting method change numberfor a change to the method of accountingunder this section 11.10 is “222.”

(8) Contact information. For furtherinformation regarding a change underthis section, contact Merrill Feldstein at(202) 317-5100 (not a toll-free call).

SECTION 12. UNIFORMCAPITALIZATION (UNICAP)METHODS (§ 263A)

.01 Certain uniform capitalization(UNICAP) methods used by resellersand reseller-producers.

(1) Description of change.(a) Applicability. This change applies to:(i) a small reseller of personal property

that wants to change from a permissibleUNICAP method to a permissible non-UNICAP inventory capitalization methodin any taxable year that it qualifies as asmall reseller;

(ii) a formerly small reseller that wantsto change from a permissible non-UNICAP inventory capitalization methodto a permissible UNICAP method in thefirst taxable year that it does not qualify asa small reseller;

(iii) a reseller-producer that wants tochange from a permissible UNICAPmethod for both its production and resaleactivities to a permissible simplified resalemethod described in § 1.263A–3(d)(3) inany taxable year that it qualifies to use asimplified resale method for both its pro-duction and resale activities under§ 1.263A–3(a)(4) (resellers with de mini-mis production activities);

(iv) a reseller-producer that wants tochange from a permissible simplified re-sale method described in § 1.263A–3(d)(3) for both its production and resaleactivities to a permissible UNICAPmethod for both its production and resaleactivities in the first taxable year that it

does not qualify to use a simplified resalemethod for both its production and resaleactivities under § 1.263A–3(a)(4);

(v) a reseller that wants to change itspermissible UNICAP method to includea special reseller cost allocation rule;

(vi) a reseller or reseller-producer thatwants to change to a UNICAP method (ormethods) specifically described in the reg-ulations and includes any necessarychanges in the identification of costs sub-ject to § 263A that will be accounted forusing the proposed method in any taxableyear, other than the first taxable year, thatit does not qualify as a small reseller; or

(vii) a reseller or reseller-producer thatwants to change from not capitalizing acost subject to § 263A to capitalizing thatcost under a UNICAP method (or meth-ods) specifically described in the regula-tions that the reseller or reseller-produceris already using.

(b) Inapplicability.(i) Self-constructed assets. This change

does not apply to a taxpayer that wants touse either the simplified service costmethod or the simplified productionmethod for self-constructed assets under§§ 1.263A–1(h)(2)(i)(D) and 1.263A–2(b)(2)(i)(D).

(ii) Historic absorption ratio. Thischange does not apply to a taxpayer thatwants to make an historic absorption ratioelection under §§ 1.263A–2(b)(4) or1.263A–3(d)(4), or to a taxpayer that wantsto revoke an election to use the historicabsorption ratio with the simplified resalemethod (see § 1.263A–3(d)(4)(iii)(B)), in-cluding a taxpayer using the simplified re-sale method with an historic absorptionratio that wants to change to a UNICAPmethod specifically described in the reg-ulations that does not include the his-toric absorption ratio. However, thischange applies to a small reseller thatwants to change from the historic ab-sorption ratio with the simplified resalemethod to a permissible non-UNICAPinventory capitalization method undersection 12.01(1)(a)(i) of this revenue proce-dure.

(iii) Interest capitalization. Thischange does not apply to a change inmethod of accounting for interest capital-ization (but see section 12.14 of this rev-enue procedure for making this change).

(iv) Recharacterizing costs under thesimplified resale method. This changedoes not include a change for purposes ofrecharacterizing “section 471 costs” as“additional § 263A costs” (or vice versa)under the simplified resale method.

(2) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to the changesdescribed insection 12.01(1)(a)(i) and (ii)of this revenue procedure.

(3) Definitions.(a) “Reseller” means a taxpayer that

acquires real or personal property de-scribed in § 1221(a)(1) for resale.

(b) “Small reseller” means a resellerwhose average annual gross receipts forthe three immediately preceding taxableyears (or fewer, if the taxpayer has notbeen in existence for the three precedingtaxable years) do not exceed $10,000,000.See § 263A(b)(2)(B).

(c) “Formerly small reseller” means areseller that no longer qualifies as a smallreseller.

(d) “Producer” means a taxpayer thatproduces real or tangible personal property.

(e) “Reseller-producer” means a tax-payer that is both a producer and a re-seller.

(f) “Permissible UNICAP method”means a method of capitalizing costs thatis permissible under § 263A.

(g) “A UNICAP method specificallydescribed in the regulations” includes the90–10 de minimis rule to allocate a mixedservice department’s costs to resale activ-ities (§ 1.263A–1(g)(4)(ii)), the 1/3–2/3rule to allocate labor costs of personnel topurchasing activities (§ 1.263A–3(c)(3)(ii)(A)), the 90–10 de minimis ruleto allocate a dual-function storage facili-ty’s costs to property acquired for resale(§ 1.263A–3(c)(5)(iii)(C)), the specificidentification method (§ 1.263A–1(f)(2)),the burden rate method (§ 1.263A–1(f)(3)), the standard cost method(§ 1.263A–1(f)(3)), the direct reallocationmethod (§ 1.263A–1(g)(4)(iii)(A)), thestep-allocation method (§ 1.263A–1(g)(4)(iii)(B)), the simplified service costmethod (§ 1.263A–1(h)) (with a labor-based allocation ratio), and the simplifiedresale method without the historic absorp-tion ratio election (§ 1.263A–3(d)), butdoes not include any other reasonable al-

May 23, 2016 Bulletin No. 2016–21928

location method within the meaning of§ 1.263A–1(f)(4).

(h) “Special reseller cost allocation rule”means the 90–10 de minimis rule to allocatea mixed service department’s costs to prop-erty acquired for resale (§ 1.263A–1(g)(4)(ii)), the 1/3 – 2/3 rule to allocatelabor costs of personnel to purchasing activ-ities (§ 1.263A–3(c)(3)(ii)(A)), and the90–10 de minimis rule to allocate a dual-function storage facility’s costs to propertyacquired for resale (§ 1.263A–3(c)(5)(iii)(C)).

(i) “Permissible non-UNICAP inven-tory capitalization method” means amethod of capitalizing inventory coststhat is permissible under § 471.

(4) Section 481(a) adjustment period.Beginning with the year of change, a tax-payer changing its method of accountingfor costs pursuant to section 12.01(1)(a)(i),12.01(1)(a)(iii), or 12.01(1)(a)(iv) of thisrevenue procedure generally must take any

applicable net positive § 481(a) adjustmentfor such change into account ratably overthe same number of taxable years, not toexceed four, that the taxpayer used its for-mer method of accounting. A taxpayerchanging its method of accounting for costspursuant to section 12.01(1)(a)(ii),12.01(1)(a)(v), or 12.01(1)(a)(vi) of this rev-enue procedure must take any applicable netpositive § 481(a) adjustment for suchchange into account as provided in section7.03 of Rev. Proc. 2015–13.

(5) Multiple changes. A taxpayer mak-ing both this change and another changein method of accounting for the same yearof change must comply with the orderingrules of § 1.263A–7(b)(2).


(7) Example. The following exampleillustrates the principles of this section12.01 for small resellers and formerlysmall resellers.

Assume X, a corporate reseller of per-sonal property, incorporated January 2,2005, adopted a taxable year ending De-cember 31. In determining whether X is asmall reseller, as provided in section12.01(3)(b) of this revenue procedure, Xcalculates its average annual gross re-ceipts for the three taxable years (orfewer, if applicable) immediately preced-ing the taxable year being analyzed. Foreach of the taxable years 2005 through2014, X calculates the corresponding av-erage annual gross receipts for the threeimmediately preceding taxable years (orfewer, if applicable). The results areshown in the table below:

CurrentTaxableYear

Average Annual GrossReceipts for the Three TaxableYears Immediately Preceding theCurrent Taxable Year

2005 $ 0

2006 5,000,000

2007 6,000,000

2008 7,000,000

2009 11,000,000

2010 11,000,000

2011 9,000,000

2012 8,000,000

2013 11,000,000

2014 12,000,000Furthermore, X which adopted the dollar-value LIFO inventory method, has the following LIFO inventory balances determined

without considering the effects of the UNICAP method:

Beginning Ending

2009 $1,000,000 $1,100,000

2010 1,100,000 1,200,000

2011 1,200,000 1,300,000

2012 1,300,000 1,400,000

2013 1,400,000 1,500,000

2014 1,500,000 1,600,000

X was required by § 263A to change tothe UNICAP method for 2009 because itsaverage annual gross receipts for the three

taxable years immediately preceding 2009were $11,000,000, which exceeded the$10,000,000 ceiling permitted by the small

reseller exception. Assume that X was re-quired to capitalize $80,000 of “additional§ 263A costs” to the cost of its 2009 begin-

Bulletin No. 2016–21 May 23, 2016929

ning inventory because of this change ininventory method. In addition, X was re-quired to include one-fourth of the § 481(a)adjustment when computing taxable incomefor each of the four taxable years beginningwith 2009. Thus, X was required to include

a $20,000 positive § 481(a) adjustment in its2009 taxable income.

X elected to use the simplified resalemethod without an historic absorption ratioelection under § 1.263A–3(d)(3) for deter-mining the amount of additional § 263A

costs to be capitalized to each LIFO layer.Assume that X was required to add $10,000of additional § 263A costs to the cost of its2009 ending inventory because of the$100,000 increment for 2009.

X’s 2009 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,000,000

2009 Increment 100,000

Additional § 263A Costs in Beginning Inventory 80,000

Additional § 263A Costs in 2009 Increment 10,000

Total 2009 Ending Inventory $1,190,000

X’s Unamortized 2009 § 481(a) Adjustment:

2009 § 481(a) Adjustment $80,000

Amount included in 2009 Taxable Income �20,000�

Unamortized 2009 § 481(a) Adjustment—12/31/09 $60,000

Because X failed to satisfy the small reseller exception for 2010, X was required to continue using the UNICAP method for itsinventory costs. Furthermore, X was required to include $20,000 of the unamortized 2009 positive § 481(a) adjustment in 2010taxable income. Assume that X was required to add $10,000 of additional § 263A costs to the cost of its 2010 ending inventorybecause of the $100,000 increment for 2010.


Beginning Inventory (With UNICAP costs) $1,190,000






Amount Included in 2010 Taxable Income �20,000�


Because X satisfied the small reseller exception for 2011, X may change voluntarily from the UNICAP method to a permissiblenon-UNICAP inventory capitalization method (such a change for a current taxable year is provided in section 12.01 of this revenueprocedure). To reflect the removal of the additional § 263A costs from the cost of its 2011 beginning inventory, X must compute acorresponding § 481(a) adjustment, which is a negative $100,000 ($1,200,000 - $1,300,000). The entire amount of this negative§ 481(a) adjustment is included in the computation of X’s taxable income for 2011. In addition, X must include $20,000 of theunamortized 2009 § 481(a) adjustment in 2011 taxable income.


May 23, 2016 Bulletin No. 2016–21930

Beginning Inventory (With UNICAP costs)$1,300,000


2011 § 481(a) Adjustment �Negative� �100,000�







2011 § 481(a) Adjustment �Negative� $�100,000�

Amount included in 2011 Taxable Income 100,000

Unamortized 2011 § 481(a) Adjustment—12/31/11 $ 0

X also satisfies the small reseller exception for 2012 and, therefore, is not required to return to the UNICAP method for 2012. X,however, must include $20,000 of the unamortized 2009 positive § 481(a) adjustment in its 2012 taxable income.







Amount in 2012 Taxable Income �20,000�

Unamortized 2009 § 481(a) Adjustment—12/31/12 $ 0

In 2013, X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method (such a change for acurrent taxable year is provided in section 12.01 of this revenue procedure). X changes to the simplified resale method without ahistoric absorption ratio election under § 1.263A–3(d)(3). Assume that X must capitalize $120,000 of additional § 263A costs to thecost of its 2013 beginning inventory because of this change in inventory method. Because X used a non-UNICAP method for twotaxable years prior to 2013, the § 481 spread period for the positive § 481(a) adjustment is two years. Therefore, X must includeone-half of the § 481(a) adjustment ($60,000) when computing taxable income for 2013 and 2014. Assume that X must add $10,000of additional § 263A costs to the cost of its 2013 ending inventory because of the $100,000 increment for 2013.




Additional § 263A costs in Beginning Inventory 120,000

Additional § 263A costs in 2013 Increment 10,000



Bulletin No. 2016–21 May 23, 2016931

2013 § 481 Adjustment$ 120,000


Unamortized 2013 § 481(a) Adjustment—12/31/13

$ 60,000

Because X fails to satisfy the small reseller exception for 2014, X must continue using the UNICAP method for its inventory costs.Furthermore, X is required to include $60,000 of the unamortized 2013 positive § 481(a) adjustment in 2014 taxable income. Assumethat X is required to add $10,000 of additional § 263A costs to the cost of its 2014 ending inventory because of the $100,000increment for 2014.


Beginning Inventory (With UNICAP costs) $1,630,000





Unamortized 2013 § 481(a) Adjustment—12/31/13$ 60,000


Unamortized 2013 § 481(a) Adjustment—12/31/14 $ ___ 0

(8) Contact information. For further in-formation regarding a change under thissection, contact Natasha Mulleneaux, at(202) 317-7007 (not a toll-free call).

.02 Certain uniform capitalization(UNICAP) methods used by producersand reseller-producers.


to a producer (as defined in section12.01(3)(d) of this revenue procedure)or a reseller-producer (as defined in sec-tion 12.01(3)(e) of this revenue proce-dure) that wants to change to a UNICAPmethod (or methods) specifically de-scribed in the regulations, including anynecessary changes in the identificationof costs subject to § 263A that will beaccounted for using the proposedmethod. This change also includes achange from not capitalizing a cost sub-ject to § 263A to capitalizing that costfor a producer or a reseller-producer un-der a UNICAP method (or methods)specifically described in the regulationsthat the producer or reseller-producer isalready using.

(b) Inapplicability.(i) Self-constructed assets. This change

does not apply to a taxpayer that wants touse either the simplified service costmethod or the simplified productionmethod for self-constructed assets under§§ 1.263A–1(h)(2)(i)(D) and 1.263A–2(b)(2)(i)(D).

(ii) Historic absorption ratio. Thischange does not apply to a taxpayer thatwants to make an historic absorption ratioelection under §§ 1.263A–2(b)(4) or1.263A–3(d)(4), or to a taxpayer thatwants to revoke an election to use thehistoric absorption ratio with the simpli-fied production method (see § 1.263A–2(b)(4)(iii)(B)), including a taxpayer us-ing the simplified production method withan historic absorption ratio changing to aUNICAP method specifically described inthe regulations that does not include thehistoric absorption ratio.

(iii) Interest capitalization. Thischange does not apply to a change inmethod of accounting for interest capital-ization (but see section 12.14 of this rev-enue procedure for making this change).

(iv) Recharacterizing costs under thesimplified production method. Thischange does not include a change for pur-poses of recharacterizing “section 471costs” as “additional § 263A costs” (orvice versa) under the simplified produc-tion method.

(2) Definition. A “UNICAP methodspecifically described in the regulations”includes the 90–10 de minimis rule toallocate a mixed service department’scosts to production or resale activities(§ 1.263A–1(g)(4)(ii)), the 1/3 – 2/3 ruleto allocate labor costs of personnel to pur-chasing activities (§ 1.263A–3(c)(3)(ii)(A)), the 90–10 de minimis ruleto allocate a dual-function storage facili-ty’s costs to property acquired for resale(§ 1.263A–3(c)(5)(iii)(C)), the specificidentification method (§ 1.263A–1(f)(2)),the burden rate method (§ 1.263A–1(f)(3)), the standard cost method(§ 1.263A–1(f)(3)), the direct reallocationmethod (§ 1.263A–1(g)(4)(iii)(A)), thestep-allocation method (§ 1.263A–1(g)(4)(iii)(B)), the simplified service costmethod (§ 1.263–1(h)) (with either alabor-based allocation ratio or a produc-

May 23, 2016 Bulletin No. 2016–21932

tion cost allocation ratio), and the simpli-fied production method without the his-toric absorption ratio election (§ 1.263A–2(b)), but does not include any otherreasonable allocation method within themeaning of § 1.263A–1(f)(4).

(3) Multiple changes. A taxpayer mak-ing both this change and another changein method of accounting in the same yearof change must comply with the orderingrules of § 1.263A–7(b)(2).


(5) Contact information. For further in-formation regarding a change under thissection, contact Natasha Mulleneaux, at(202) 317-7007 (not a toll-free call).

.03 Impact fees.

(1) Description of change. This changeapplies to a taxpayer that incurs impactfees as defined in Rev. Rul. 2002–9,2002–1 C.B. 614, in connection with theconstruction of a new residential rentalbuilding that wants to capitalize the coststo the building under §§ 263(a) and 263A.See Rev. Rul. 2002–9 for further informa-tion.


(3) Contact information. For further in-formation regarding a change under thissection, contact Natasha Mulleneaux at(202) 317-7007 (not a toll-free call).

.04 Change to capitalizingenvironmental remediation costs under§ 263A.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for environmen-tal remediation costs from a method thatdoes not comply with the holding in Rev.Rul. 2004–18, 2004–1 C.B. 509, to cap-italizing them to inventory under § 263A.

(2) Concurrent automatic changes. Ataxpayer making both this change and an-other automatic change under § 263A forthe same year of change may file a singleForm 3115 for both changes, provided the

taxpayer enters the designated automaticchange numbers for both changes on theappropriate line on that Form 3115, andcomplies with the ordering rules of§ 1.263A–7(b)(2). See section 6.03(1)(b)of Rev. Proc. 2015–13, 2015–5 I.R.B.419, for information on making concur-rent changes.


(4) Contact information. For further in-formation regarding a change under thissection, contact Sean Dwyer at (202) 317-7005 (not a toll-free call).

.05 Change in allocating environmentalremediation costs under § 263A.

(1) Description of change. This changeapplies to a taxpayer that capitalizes envi-ronmental remediation costs to inventoryunder § 263A, but allocates these costs toinventory using a method of accountingthat does not comply with the holding inRev. Rul. 2005–42, 2005–2 C.B. 67, andwants to change to allocating these coststo inventory produced during the taxableyear in which the costs are incurred under§ 263A. See Rev. Rul. 2005–42 for fur-ther information.

(2) Concurrent automatic changes. Ataxpayer making both this change and an-other automatic change under § 263A forthe same year of change may file a singleForm 3115 for both changes, provided thetaxpayer enters the designated automaticaccounting method change numbers forboth changes on the appropriate line onthat Form 3115, and complies with theordering rules of § 1.263A–7(b)(2). Seesection 6.03(1)(b) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, for information onmaking concurrent changes.



.06 Safe harbor methods under § 263Afor certain dealerships of motorvehicles.

(1) Description of change. This changeapplies to a motor vehicle dealership, asdefined in section 4 of Rev. Proc. 2010–44, 2010–49 I.R.B. 811, that is within thescope of section 3 of Rev. Proc. 2010–44and wants to change its method of ac-counting to (1) treat its sales facility as aretail sales facility or (2) be treated as areseller without production activities, asdescribed in section 5 of Rev. Proc. 2010–44. A motor vehicle dealership that wantsto make an automatic change in method ofaccounting to use one or both safe harbormethods described in section 5 of Rev.Proc. 2010–44 may make any corre-sponding changes in the identification ofcosts subject to § 263A that will be ac-counted for using the proposed method(for example, to remove internal profitfrom inventory costs) or to no longer in-clude negative amounts as additional§ 263A costs in the numerator of the sim-plified resale method formula or the sim-plified production method formula. How-ever, except as provided in the precedingsentence, a change under this section doesnot include a change for purposes of re-characterizing “§ 471 costs” as “addi-tional § 263A costs” (or vice versa) underthe simplified resale method or the sim-plified production method.

(2) Concurrent automatic changes. Amotor vehicle dealership making an auto-matic change to one or both safe harbormethods described in section 5 of Rev.Proc. 2010–44 and another automaticchange under § 263A for the same taxableyear may file one Form 3115 to make bothchanges, provided the dealership entersthe designated automatic change numbersfor all such changes in Part I on that Form3115, and complies with the orderingrules of § 1.263A–7(b)(2). See section6.03(1)(b) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, for information on makingconcurrent changes.

(3) Multiple adjustments. In the eventthat a motor vehicle dealership is takinginto account a § 481(a) adjustment fromanother accounting method change in ad-dition to the § 481(a) adjustment requiredby a change to a safe harbor method de-scribed in section 5 of Rev. Proc. 2010–

Bulletin No. 2016–21 May 23, 2016933

44, the § 481(a) adjustments must betaken into account separately. For exam-ple, a motor vehicle dealership thatchanged to comply with § 263A in 2009and was required to take its § 481(a) ad-justment into account over four yearsmust continue to take into account thatadjustment over the remainder of that fouryear § 481(a) adjustment period eventhough the dealership changed to a safeharbor method described in section 5 ofRev. Proc. 2010–44 in 2010 and has anadditional § 481(a) adjustment requiredby that change.

(4) Designated automatic accountingmethod change numbers. The designatedautomatic accounting method changenumber for a change to treat certain salesfacilities as retail sales facilities as de-scribed in section 5.01 of Rev. Proc.2010–44 is “150.” The designated auto-matic accounting method change numberfor a change to be treated as a resellerwithout production activities as describedin section 5.02 of Rev. Proc. 2010–44 is“151.”


.07 Change to not apply § 263A to oneor more plants removed from the list ofplants that have a preproductive periodin excess of 2 years.

(1) Description of change. Thischange, as described in Rev. Proc. 2013–20, 2013–14 I.R.B. 744, applies to a tax-payer that is not a corporation, partner-ship, or tax shelter required to use anaccrual method of accounting under § 447or § 448(a)(3), and either (a) wants to notapply § 263A, pursuant to § 263A(d)(1)and § 1.263A–4(a)(2), to the productionof one or more plants that the IRS and theTreasury Department have removed fromthe list of plants that have a nationwideweighted average preproductive period inexcess of 2 years, or (b) properly elected,pursuant to § 263A(d)(3) and § 1.263A–4(d), to not apply § 263A to the produc-tion of a plant or plants that have beenremoved from the list of plants that have anationwide weighted average preproduc-tive period in excess of 2 years, andwishes to revoke its § 263A(d)(3) electionwith respect to those plants. See Notice

2013–18, 2013–14 I.R.B. 742, or its suc-cessor.

(2) Certain eligibility rule temporarilyinapplicable. The eligibility rule in sec-tion 5.01(1)(f) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to ataxpayer that wants to make the changefor its first or second taxable year endingafter February 15, 2013.

(3) Audit protection. If a taxpayer cur-rently does not apply § 263A to its black-berry, raspberry, or papaya plants in amanner that complies with the require-ments of § 263A(d)(1) and § 1.263A–4(a)(2), the IRS will not raise such methodof accounting for a taxable year that endson or before February 15, 2013. Also, ifthe use of such a method of accounting bya taxpayer is an issue under consideration(within the meaning of section 3.08 ofRev. Proc. 2015–13) for taxable years inexamination, before an Appeals office, orbefore the U.S. Tax Court in a taxableyear that ends on or before February 15,2013, the IRS will not further pursue thatissue.

(4) Manner of making change. Achange under this section 12.07 is madewith any necessary adjustments under§ 481(a). For example, the revocation ofan election under § 263A(d)(3) results in a§ 481(a) adjustment that must take intoaccount the change in depreciation fromthe alternative depreciation system to thegeneral depreciation system includedwithin such revocation.



.08 Change to a reasonable allocationmethod described in § 1.263A–1(f)(4)for self-constructed assets.


scribed in Rev. Proc. 2014–16, 2014–9I.R.B. 606, applies to a producer (as de-fined in section 12.01(3)(d) of this reve-nue procedure) or a reseller-producer (asdefined in section 12.01(3)(e) of this rev-enue procedure) that wants to change to a

reasonable allocation method within themeaning of § 1.263A–1(f)(4), other thanthe methods specifically described in§ 1.263A–1(f)(2) or (3), for self-constructed assets produced during thetaxable year, including any necessarychanges in the identification of costs sub-ject to § 263A that will be accounted forusing the proposed method. This section12.08 also includes a change from notcapitalizing a cost subject to § 263A tocapitalizing that cost for a producer orreseller-producer under a reasonable allo-cation method within the meaning of§ 1.263A–1(f)(4) that the producer orreseller-producer is already using for self-constructed assets, other than the methodsspecifically described in § 1.263A–1(f)(2)or (3). See section 12.02 of this revenueprocedure for a producer or reseller-producer that wants to change to a methoddescribed in § 1.263A–1(f)(2) or (3).

(b) Inapplicability. This change doesnot apply to an allocation method basedon the number of units produced or anallocation method that does not allocatecosts to the units of property produced.This change does not apply to a changedescribed in another section of this reve-nue procedure or in other guidance pub-lished in the Internal Revenue Bulletin.For example, this change does not applyto a change described in section 12.01 or12.02 of this revenue procedure.

(2) No ruling on reasonableness ofmethod. The consent granted in section 9of Rev. Proc. 2015–13, 2015–5 I.R.B.419, for this change is not a determinationby the Commissioner that the taxpayer isusing a reasonable allocation method forcosts subject to § 263A and does not cre-ate any presumption that the proposed al-location method is permissible. The direc-tor will ascertain whether the taxpayer’sallocation method is reasonable within themeaning of § 1.263A–1(f)(4).

(3) Multiple changes. A taxpayer mak-ing both this change and another changein method of accounting under section11.08 of this revenue procedure for thesame year of change must comply withthe ordering rules of § 1.263A–7(b)(2).


May 23, 2016 Bulletin No. 2016–21934


.09 Real property acquired throughforeclosure.

(1) Applicability. This change, as de-scribed in Rev. Proc. 2014–16, 2014–9I.R.B. 606, applies to a taxpayer that cap-italizes costs under § 263A(b)(2) and§ 1.263A–3(a)(1) to real property ac-quired through foreclosure, or similartransaction, where the taxpayer wants tochange its method of accounting to anotherwise permissible method of account-ing under which the acquisition and hold-ing costs for real property acquiredthrough foreclosure, or similar transac-tion, are not capitalized under§ 263A(b)(2) and § 1.263A–3(a)(1). Toqualify for this change in method of ac-counting, a taxpayer must:

(a) originate, or acquire and hold forinvestment, loans that are secured by realproperty; and

(b) acquire the real property that se-cures the loans at a foreclosure sale, bydeed in lieu of foreclosure, or in anothersimilar transaction.

(2) Inapplicability. This change doesnot apply to costs capitalized under§ 263A(b)(1) and § 1.263A–2(a)(1) by thetaxpayer to the acquired real property as aresult of production activities.

(3) Certain eligibility rule temporarilyinapplicable. The eligibility rule in sec-tion 5.01(1)(f) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to ataxpayer that makes this change for itsfirst or second taxable year ending afterDecember 31, 2012.

(4) Designated automatic accountingmethod change numbers. The designatedautomatic accounting method changenumber for a change under this section12.09 is “195.”

(5) Contact information. For further in-formation regarding a change under thissection, contact Sue-Jean Kim at (202)317-7007 (not a toll-free call).

.10 Sales-Based Royalties.

(1) Description of change. Thischange, as described in Rev. Proc. 2014–33, 2014–22 I.R.B. 1060, applies to a

taxpayer that wants to change its methodof accounting for sales-based royalties (asdescribed in § 1.263A–1(e)(3)(ii)(U)(2))that are properly allocable to inventoryproperty:

(a) From not capitalizing sales-basedroyalties to capitalizing these costs andallocating them entirely to cost of goodssold under a taxpayer’s method of ac-counting;

(b) From not capitalizing sales-basedroyalties to capitalizing these costs andallocating them to inventory property un-der a taxpayer’s method of accounting;

(c) From capitalizing sales-based roy-alties and allocating these costs to inven-tory property to allocating them entirely tocost of goods sold; or

(d) From capitalizing sales-based roy-alties and allocating these costs entirely tocost of goods sold to allocating them toinventory property.

(2) Limitations.(a) A taxpayer may not make a change

in method of accounting under this section12.10 if the taxpayer wants to change tocapitalizing sales-based royalties and allo-cating them to inventory property using another reasonable allocation method withinthe meaning of § 1.263A–1(f)(4).

(b) A taxpayer making the changes de-scribed in section 12.10(1)(a) or12.10(1)(c) of this revenue procedure thatuses a simplified method to determine theadditional § 263A costs allocable to in-ventory property on hand at year end mustremove sales-based royalties allocated tocost of goods sold from the formulas usedto allocate additional § 263A costs to end-ing inventory in the same manner that thetaxpayer included these amounts in theformulas.

(c) A taxpayer making a change inmethod of accounting under this section12.10 that uses a simplified method withan historic absorption ratio election (see§§ 1.263A–2(b)(4) and 1.263A–3(d)(4))and currently includes, or is changing itsmethod to include, sales-based royalties inany part of its historic absorption ratiomust revise its previous and current his-toric absorption ratios. To revise its his-toric absorption ratios, the taxpayer mustapply its proposed method of accountingduring the test period, during all recom-putation years, and during all updated testperiods to determine the § 471 costs and

additional § 263A costs that were in-curred. The revised historic absorption ra-tios must be used to revalue beginninginventory and must be accounted for inthe taxpayer’s § 481(a) adjustment. Thetaxpayer must use a method described in§ 1.263A–7(c) to revalue beginning in-ventory.

(3) Certain eligibility rule temporarilyinapplicable. The eligibility rule in sec-tion 5.01(1)(f) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to thischange for a taxpayer’s first and secondtaxable years ending on or after January13, 2014.

(4) Concurrent automatic changes. Ataxpayer making a change under this sec-tion 12.10 and one or more automaticchanges in method of accounting under§ 263A for the same year of change mayfile a single Form 3115 for all changes,provided the taxpayer enters the desig-nated automatic change numbers for allchanges on the appropriate line on theForm 3115 and complies with the order-ing rules of § 1.263A–7(b)(2). See section6.03(1)(b) of Rev. Proc. 2015–13 for in-formation on making concurrent changes.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in method of account-ing under this section 12.10 is “201.”


.11 Treatment of Sales-Based VendorChargebacks under a Simplified Method.

(1) Description of change. Thischange, as described in Rev. Proc. 2014–33, 2014–22 I.R.B. 1060, applies to ataxpayer that wants to change its methodof accounting to no longer include costadjustments for sales-based vendorchargebacks described in § 1.471–3(e)(1)in the formulas used to allocate additional§ 263A costs to ending inventory under asimplified method.

(2) Limitations.(a) A taxpayer making this change that

uses a simplified method to determine theadditional § 263A costs allocable to in-ventory property on hand at year end mustremove sales-based vendor chargebacksfrom the formulas used to allocate addi-

Bulletin No. 2016–21 May 23, 2016935

tional § 263A costs to ending inventory inthe same manner that the taxpayer in-cluded these amounts in the formulas.

(b) A taxpayer making a change inmethod of accounting under this section12.11 that uses a simplified method withan historic absorption ratio election (see§§ 1.263A–2(b)(4) and 1.263A–3(d)(4))and currently includes sales-based vendorchargebacks in any part of its historic ab-sorption ratio must revise its previous andcurrent historic absorption ratio(s). To re-vise its historic absorption ratios, the tax-payer must apply its proposed method ofaccounting during the test period, duringall recomputation years, and during allupdated test periods to determine the§ 471 costs and additional § 263A coststhat were incurred. The revised historicabsorption ratios must be used to revaluebeginning inventory and must be ac-counted for in the taxpayer’s § 481(a)adjustment. The taxpayer must use amethod described in § 1.263A–7(c) to re-value beginning inventory.


(4) Concurrent automatic changes. Ataxpayer making both this change and oneor more automatic changes under § 263A,or both this change and the change de-scribed in section 21.15 of this revenueprocedure for the same taxable year ofchange may file a single Form 3115 forboth changes, provided the taxpayer en-ters the designated automatic changenumbers for all changes on the appropri-ate line on the Form 3115 and complieswith the ordering rules of § 1.263A–7(b)(2). See section 6.03(1)(b) of Rev.Proc. 2015–13 for information on makingconcurrent changes.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in method of account-ing under this section 12.11 is “202”.


.12 U.S. ratio method.

(1) Change to the U.S. ratio method.(a) Description of change. This change

applies to a foreign person, as defined inNotice 88–104, 1988–2 C.B. 443, asmodified by Notice 89–67, 1989–1 C.B.723, that is required to capitalize costsunder § 263A and wants to change itsmethod of accounting to the U.S. ratiomethod, as described in Notice 88–104.

(b) Manner of making change. A tax-payer requesting a change on behalf of aforeign person under section 12.12(1) ofthis revenue procedure must attach a state-ment to the Form 3115 providing the fol-lowing information:

(i) Foreign person requirement. A rep-resentation that the foreign person is aqualified business unit (QBU), as definedin § 1.989(a)–1(b), of a foreign person, orthe foreign branch of a U.S. person thatconstitutes a separate QBU, within themeaning of Notice 88–104. If the tax-payer is requesting a change in method ofaccounting on behalf of multiple foreignpersons, please provide a representationthat each foreign person is a QBU, asdefined in § 1.989(a)–1(b), of a foreignperson or the foreign branch of a U.S.person that constitutes a separate QBU,within the meaning of Notice 88–104;

(ii) Description of trade or business.The name and employer identificationnumber (if applicable) for each foreignperson and an explanation of each trade orbusiness, as defined in § 1.446–1(d), forwhich a request to change to the U.S. ratiomethod is being made under this section12.12(1);

(iii) Applicable U.S. trade or businessrequirement. The identity of the “applica-ble U.S. trade or business,” as defined inNotice 88–104, that the foreign personwishes to use and an explanation of howthis U.S. trade or business is “the same as,or most similar to” the trade or businessconducted by the foreign person. If thetaxpayer is requesting a change in methodof accounting for multiple foreign per-sons, the taxpayer must identify the “ap-plicable U.S. trade or business” for eachforeign person, and explain how the re-spective U.S. trade or business is “thesame as, or most similar to” the trade orbusiness conducted by the foreign person;and

(iv) Relationship requirement. An ex-planation of how the “applicable U.S.trade or business” identified in section12.12(1)(b)(iii) of this revenue procedureis a trade or business conducted in theUnited States by a “related person,” asdefined in Notice 88–104, with respect tothe foreign person requesting a changeunder this section. If the taxpayer is re-questing a change in method of account-ing for multiple foreign persons, the tax-payer must explain how the “applicableU.S. trade or business” identified in sec-tion 12.12(1)(b)(iii) of this revenue proce-dure is a trade or business conducted inthe United States by “related person” forpurposes of Notice 88–104 for each for-eign person requesting a change inmethod of accounting. Use §§ 267(b) or707(b), as applicable, to explain the rela-tionship.

(c) Additional requirements.(i) A foreign person must continue to

use the U.S. ratio of the applicable U.S.trade or business identified in section12.12(1)(b)(iii) of this revenue procedureunless consent of the Commissioner isobtained to use the U.S. ratio of a differentapplicable U.S. trade or business under§ 446(e) (see section 12.12(2) of this rev-enue procedure);

(ii) In the case of a controlled foreigncorporation, the controlling U.S. share-holder, or in the case of a foreign branchof a U.S. person, the U.S. person, mustmaintain records of the U.S. ratio used byeach foreign person to calculate the addi-tional § 263A costs capitalized to propertyproduced and property acquired for resalefor the year of change and for subsequenttaxable years for each foreign person re-questing a change in method of account-ing under this section 12.12. In the case ofa controlled foreign partnership, the U.S.partner must maintain records of the U.S.ratio used by each foreign person to cal-culate the additional § 263A costs capital-ized to property produced and propertyacquired for resale for the year of changeand for subsequent taxable years for eachforeign person requesting a change inmethod of accounting under this section12.12.

(iii) The § 481(a) adjustment is com-puted in the manner provided in Notice88–104;

May 23, 2016 Bulletin No. 2016–21936

(iv) The U.S. ratio is determined, andthe ratio is applied to the costs of propertyproduced or property acquired for resaleincurred by the foreign person, in accor-dance with Notice 88–104; and

(v) If any foreign person is unable toobtain a U.S. ratio from the applicableU.S. trade or business identified in section12.12(2)(b)(iii) of this revenue procedure,or is otherwise no longer eligible to usethe U.S. ratio method, the foreign personis no longer permitted to use the U.S. ratiomethod. However, the foreign person isnot ineligible to use the U.S. ratio methodif the foreign person is able to obtain aU.S. ratio from a different applicable U.S.trade or business, and changes the appli-cable U.S. trade or business pursuant tosection 12.12(2) of this revenue procedureor under the non-automatic change proce-dures of this revenue procedure, as appli-cable. If a foreign person is no longereligible to use the U.S. ratio method, it isrequired to change its method of account-ing to a method that complies with§§ 263A and 471 using either the auto-matic change procedures of Rev. Proc.2015–13, 2015–5 I.R.B. 419, and sections12.01, 12.02, or 12.08, as applicable, ofthis revenue procedure or the non-automatic change procedures of Rev.Proc. 2015–13.

(2) Change within U.S. ratio method.This change applies to a foreign personcurrently using the U.S. ratio method thatwants to use the U.S. ratio of a differentapplicable U.S. trade or business for pur-poses of applying the U.S. ratio method asdescribed in section 12.12(2)(a) or12.12(2)(b) of this revenue procedure.

(a) Required change in the applicableU.S. trade or business.

(i) In general. A foreign person is per-mitted to change its method of accountingunder this section 12.12(2)(a) to use theU.S. ratio of a different applicable U.S.trade or business, as defined in Notice88–104, if the foreign person is no longerable to obtain the U.S. ratio from theapplicable U.S. trade or business previ-ously identified and if: (A) the U.S. personor related person in which the applicableU.S. trade or business is conducted termi-nates its existence; (B) the foreign personis no longer related, within the meaning of§ 267(b) or § 707(b), to the U.S. person orrelated person in which the applicable

U.S. trade or business is conducted; or (C)the U.S. person or related person ceases toconduct the applicable U.S. trade or busi-ness.

(ii) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13 does notapply to the change described in section12.12(2)(a) of this revenue procedure.

(iii) Manner of making change. A for-eign person making a change in method ofaccounting under this section 12.12(2)(a)must make the change in accordance withthe requirement set forth in section12.12(2)(c) of this revenue procedure.

(b) Other changes in the applicableU.S. trade or business.

(i) In general. If the foreign personcannot make the change in method of ac-counting described in section 12.12(2)(a)of this revenue procedure, or there is morethan one U.S. trade or business that canreasonably be considered the “same as, ormost similar to” the foreign person’s tradeor business, the foreign person is permit-ted to change its method of accountingunder this section 12.12(2)(b) to use theU.S. ratio of a different applicable U.S.trade or business.

(ii) Manner of making change. A for-eign person making a change in method ofaccounting under this section 12.12(2)(b)must make the change in accordance withthe requirement set forth in section12.12(2)(c) of this revenue procedure.

(c) Short Form 3115 in lieu of a Form3115. In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–1(e)(3)(i) to file a Form 3115 is waivedand pursuant to section 6.02(2) of Rev.Proc. 2015–13, a short Form 3115 is au-thorized for a change described in section12.12(2)(a) or 12.12(2)(b) of this revenueprocedure. The short Form 3115 (Rev.December 2015) must include the follow-ing information:

(i) the identification section of page 1(above Part I);

(ii) the signature section at the bottomof page 1;

(iii) Part I, line 1(a);(iv) the information required under

section 12.12(1)(b) of this revenue proce-dure; and

(v) a statement that the change inmethod of accounting is made under sec-

tion 12.12(2)(a) or 12.12(2)(b) of Rev.Proc. 2016–29, as applicable.

(3) Designated automatic accountingmethod change numbers. The designatedautomatic accounting method changenumber for a change under this section12.12 is “214.”


.13 Depletion.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for depletion totreat these amounts as an indirect cost thatis only properly allocable to property thathas been sold (that is, for purposes ofdetermining gain or loss on the sale of theproperty) under § 1.263A–1(e)(3)(ii)(J).

(2) Limitation.(a) A taxpayer making this change in

method of accounting that uses a simpli-fied method to determine the additional§ 263A costs allocable to inventory prop-erty on hand at year end must removedepletion allocated to cost of goods soldfrom the formulas used to allocate addi-tional § 263A costs to ending inventory inthe same manner that the taxpayer in-cluded these amounts in the formulas.

(b) A taxpayer making this change inmethod of accounting that uses a simpli-fied method with an historic absorptionratio election (see §§ 1.263A–2(b)(4) and1.263A–3(d)(4)) and currently includesdepletion in any part of its historic absorp-tion ratio must revise its previous andcurrent historic absorption ratios. To re-vise its historic absorption ratios, the tax-payer must apply its proposed method ofaccounting during the test period, duringall recomputation years, and during allupdated test periods to determine the§ 471 costs and additional § 263A coststhat were incurred. The revised historicabsorption ratios must be used to revaluebeginning inventory and must be ac-counted for in the taxpayer’s § 481(a)adjustment. The taxpayer must use amethod described in § 1.263A–7(c) to re-value beginning inventory


Bulletin No. 2016–21 May 23, 2016937

(4) Concurrent automatic changes. Ataxpayer making both this change and an-other automatic change under § 263A forthe same year of change may file a singleForm 3115 for both changes, provided thetaxpayer enters the designated automaticchange numbers for both changes on theappropriate line on that Form 3115 andcomplies with the ordering rules of§ 1.263A–7(b)(2). See section 6.03(1)(b)of Rev. Proc. 2015–13 for information onmaking concurrent changes.

(5) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change in method of ac-counting under this section 12.13 is“215.”


.14 Interest capitalization.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for interest fromeither not capitalizing any interest or cap-italizing interest in accordance with itsbook method of accounting, with respectto the production of designated property,to capitalizing interest with respect to theproduction of designated property in ac-cordance with §§ 1.263A–8 through 14.

(2) Manner of making change. A tax-payer requesting a change under this sec-tion 12.14 must attach a statement to theForm 3115 with the following informa-tion:

(a) Whether the taxpayer elects to nottrace debt under § 1.263A–9(d);

(b) The computation period(s) andmeasurement dates used under the newmethod;

(c) A representation that the taxpayer’smethod is in accordance with the avoidedcost method under § 1.263A–9; and

(d) A representation that the taxpayerwill comply with § 1.263A–14 and Notice88–89, 1988–2 C.B. 422, should the tax-payer incur average excess expendituresallocable to related persons.

(3) Concurrent automatic changes. Ataxpayer making a change under this sec-tion 12.14 and one or more automaticchanges in method of accounting under§ 263A for the same year of change may

file a single Form 3115 for all changes,provided the taxpayer enters the desig-nated automatic change numbers for allchanges on the appropriate line on theForm 3115 and complies with the order-ing rules of § 1.263A–7(b)(2). See section6.03(1)(b) of Rev. Proc. 2015–13 for in-formation on making concurrent changes.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change in method of ac-counting under this section 12.14 is“224.”

(5) Contact information. For further in-formation regarding a change under thissection, contact Steven Gee at (202) 317-7007 (not a toll-free call).

SECTION 13. LOSSES, EXPENSES,AND INTEREST WITH RESPECT TOTRANSACTIONS BETWEENRELATED TAXPAYERS (§ 267)

.01 Change to comply with § 267.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method or methods of accounting tocomply with the requirements of § 267,which disallows or defers certain deduc-tions attributable to transactions betweenrelated taxpayers. However, this changedoes not apply to a change for originalissue discount (OID), including stated in-terest that is OID because it is not quali-fied stated interest (as defined in§ 1.1273–1(c)). See section 5.02 of thisrevenue procedure for a change to complywith § 163(e)(3) for OID on an obligationheld by a related foreign person.

(2) Certain eligibility rules inapplica-ble. The eligibility rules in sections5.01(1)(e) and (f) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, do not apply to thischange to comply with § 267(a)(3).


(4) Contact information. For further in-formation regarding a change under thissection, contact Steven Gee at (202) 317–7007 (not a toll-free call). For further in-formation regarding a change to complywith § 267(a)(3), contact Joseph Vettingat (202) 317-4960 (not a toll-free call).

SECTION 14. DEFERREDCOMPENSATION (§ 404)

.01 Deferred compensation.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that wants tochange its method of accounting to treatbonuses or vacation pay as follows (see§ 404(a)(5) and § 1.404(b)–1T, Q&A 2):

(a) Applicability.(i) Bonuses.(A) Bonuses not subject to capitaliza-

tion under § 263A. If by the end of thetaxable year all the events have occurredthat establish the fact of the liability to paya bonus and the amount of the liability canbe determined with reasonable accuracy(see § 1.446–1(c)(1)(ii)), and the bonus isotherwise deductible, but the bonus is re-ceived by the employee after the 15th dayof the 3rd calendar month after the end ofthat taxable year, to treat the bonus asdeductible in the taxable year of the em-ployer in which or with which ends thetaxable year of the employee in which thebonus is includible in the gross income ofthe employee; or

(B) Bonuses that are subject to capi-talization under § 263A. If by the end ofthe taxable year all the events have oc-curred that establish the fact of the liabil-ity to pay a bonus and the amount of theliability can be determined with reason-able accuracy (see § 1.446–1(c)(1)(ii)),and the bonus is otherwise deductible(without regard to § 263A), but the bonusis received by the employee after the 15th

day of the 3rd calendar month after the endof that taxable year, to treat the bonus ascapitalizable (within the meaning of§ 1.263A–1(c)(3)) in the taxable year ofthe employer in which or with which endsthe taxable year of the employee in whichthe bonus is includible in the gross incomeof the employee.

(ii) Vacation pay.(A) Vacation pay not subject to capi-

talization under § 263A. If by the end ofthe taxable year all the events have oc-curred that establish the fact of the liabil-ity to pay vacation pay and the amount ofthe liability can be determined with rea-sonable accuracy (see § 1.446–1(c)(1)(ii)), and the vacation pay is other-wise deductible but the vacation pay isreceived by the employee after the 15th

May 23, 2016 Bulletin No. 2016–21938

day of the 3rd calendar month after the endof that taxable year, to treat the vacationpay as deductible in the taxable year of theemployer in which the vacation pay ispaid to the employee; or

(B) Vacation pay that is subject to cap-italization under § 263A. If by the end ofthe taxable year all the events have oc-curred that establish the fact of the liabil-ity to pay vacation pay and the amount ofthe liability can be determined with rea-sonable accuracy (see § 1.446–1(c)(1)(ii)), and the vacation pay is other-wise deductible (without regard to§ 263A), but the vacation pay is receivedby the employee after the 15th day of the3rd calendar month after the end of thattaxable year, to treat the vacation pay ascapitalizable (within the meaning of§ 1.263A–1(c)(3)) in the taxable year ofthe employer in which the vacation pay ispaid to the employee.

(b) Inapplicability. This change doesnot apply to a taxpayer that is requiredunder § 263A and the regulations there-under to capitalize the costs with respectto which the taxpayer wants to change itsmethod of accounting under this section14.01 if the taxpayer is not capitalizingthese costs, unless the taxpayer concur-rently changes its method to capitalizethese costs in conjunction with a changeto a UNICAP method under section 12.01,12.02, 12.08, or 12.12 of this revenueprocedure (as applicable).


(3) Contact information. For further in-formation regarding a change under thissection, contact Maryellen Furr at (202)317-5600 (not a toll-free call).

.02 Grace period contributions.

(1) Description of change. This changeapplies to a taxpayer that wants to ceasededucting contributions made during the§ 404(a)(6) grace period to a qualifiedcash or deferred arrangement within themeaning of § 401(k) or to a defined con-tribution plan as matching contributionswith the meaning of § 401(m) when thecontributions are attributable to compen-sation earned by plan participants after theend of a taxable year as required by Rev.

Rul. 2002–46, 2002–2 C.B. 117, as mod-ified by Rev. Rul. 2002–73, 2002–2 C.B.805.


(3) Contact information. For further in-formation regarding a change under thissection, contact David Ziegler at (202)317-8629 or Carlton Watkins at (202)317-8631 (not toll-free calls).

SECTION 15. METHODS OFACCOUNTING (§ 446)

.01 Change in overall method from thecash method to an accrual method.


to a taxpayer that wants to change itsoverall method of accounting from thecash receipts and disbursements method(cash method) (as defined in section15.01(2)(a) of this revenue procedure) toan accrual method (as defined in section15.01(2)(b) of this revenue procedure). Achange under this section 15.01 applies to(1) a taxpayer required to make thischange by § 448, any other section of theCode or regulations, or in other guidancepublished in the Internal Revenue Bulletin(IRB), as well as (2) a taxpayer that wantsto make this change but is not required todo so by § 448, any other section of theCode or regulations, or in other guidancepublished in the IRB. A taxpayer chang-ing to an overall accrual method becauseit is prohibited from using the overall cashmethod under § 448 may use this section15.01 regardless of whether the year ofchange is the first taxable year that thetaxpayer is required by § 448 to changefrom the cash method (“the first § 448year”), or is a taxable year other than thetaxpayer’s first § 448 year.

Additionally, a taxpayer qualifies tochange its overall method of accountingfrom the cash method to an accrualmethod using this section 15.01 even ifthe taxpayer is also making one or more ofthe following changes in method of ac-counting for the same year of change:

(i) adopting the recurring item excep-tion (as defined in section 15.01(2)(c) ofthis revenue procedure) for one or more

types of recurring items (see § 1.461–5(d));

(ii) adopting or changing to a permis-sible inventory method of accounting andis either adopting this inventory method orqualifies to change to this inventorymethod using the automatic change pro-cedures of Rev. Proc. 2015–13, 2015–5I.R.B. 419, and a section of this revenueprocedure, or the change can be madeautomatically under any section of theCode or regulations, or other guidancepublished in the IRB (see Rev. Rul. 90–38, 1990–1 C.B. 57 (regarding when ataxpayer may adopt a method of account-ing));

(iii) adopting or changing to a permis-sible § 263A method of accounting and iseither adopting this § 263A method orqualifies to change to this § 263A methodusing the automatic change procedures ofRev. Proc. 2015–13 and a section of thisrevenue procedure, or the change can bemade automatically under any section ofthe Code or regulations, or other guidancepublished in the IRB (see Rev. Rul. 90–38(regarding when a taxpayer may adopt amethod of accounting)); or

(iv) adopting or changing to any otherspecial method of accounting (as definedin section 15.01(2)(d) of this revenue pro-cedure) and is either adopting this specialmethod or qualifies to change to this spe-cial method using the automatic changeprocedures of Rev. Proc. 2015–13 and asection of this revenue procedure, or thechange can be made automatically underany section of the Code or regulations, orother guidance published in the IRB (seeRev. Rul. 90–38 (regarding when a tax-payer may adopt a method of account-ing));

Also, a taxpayer qualifies to use thissection 15.01 when that taxpayer, in thetaxable year immediately preceding theyear of change, has used a permissibleinventory method for that year, and, if thattaxpayer was subject to § 263A for thatyear, has also used a permissible § 263Amethod for that year, and the method(s)continue to be used for the year of change.


(i) a taxpayer that is making a changefrom a hybrid method of accounting (asdefined in section 15.01(2)(e) of this rev-enue procedure);

Bulletin No. 2016–21 May 23, 2016939

(ii) a taxpayer that is changing itsmethod of accounting for one or moreitems of income or expense, but not itsoverall method of accounting. See section15.09 of this revenue procedure for a de-scription of accounting method changesfrom the cash method to an accrualmethod for specific items that are to bemade using the automatic change proce-dures of Rev. Proc. 2015–13 and that sec-tion 15.09;

(iii) a taxpayer that is required by theCode, regulations, or other guidance pub-lished in the IRB to use a special method(for example, an inventory method, a§ 263A method, or a long-term contractmethod) in the year of change and fails toadopt or change to that method;

(iv) a taxpayer that has included in its§ 481(a) adjustment any amount of de-ferred compensation that is described un-der § 457A(d)(3) that is attributable toservices performed before January 1,2009;

(v) a taxpayer that is engaged in two ormore trades or businesses, unless that tax-payer makes this change for each trade orbusiness so that the identical accrualmethod is used for each trade or businessbeginning with the year of change;

(vi) a taxpayer that is required by § 447to change to an accrual method when theyear of change is the first taxable year thattaxpayer is required by § 447 to change tothat method;

(vii) a cooperative organization de-scribed in §§ 501(c)(12), 521, or 1381; or

(viii) an individual taxpayer, except foractivities conducted as a sole proprietor-ship.

(2) Definitions.(a) Cash method of accounting is the

method identified by § 446(c)(1) and§§ 1.446–1(c)(1)(i), 1.451–1(a), and1.461–1(a)(1). For purposes of this sec-tion 15.01, the cash method also includesthe overall cash method with inventori-able items treated as either inventory or asnon-incidental materials and supplies un-der § 1.162–3 as permitted by Rev. Proc.2001–10, 2001–1 C.B. 272, as modifiedby Rev. Proc. 2011–14, 2011–4 I.R.B.330, or Rev. Proc. 2002–28, 2002–1 C.B.815, as modified by Rev. Proc. 2011–14.

(b) Accrual method of accounting is amethod identified by § 446(c)(2) and

§§ 1.446–1(c)(1)(ii), 1.451–1(a), and1.461–1(a)(2).

(c) Recurring item exception is themethod described in § 461(h)(3) and§ 1.461–5.

(d) Special method of accountingwithin the meaning of this section 15.01 isa method of accounting, other than thecash method, expressly permitted or re-quired by the Code, regulations, or inother guidance published in the IRB thatdeviates from the tax accrual accountingrules of §§ 446, 451 and 461 and theregulations thereunder. For example, theinstallment method of accounting under§ 453, the mark-to-market method under§ 475, a long-term contract method suchas the percentage of completion methodunder § 460, and the deferral method ofRev. Proc. 2004–34, 2004–1 C.B. 991, asclarified and modified by Rev. Proc.2011–18, 2011–5 I.R.B. 443, and Rev.Proc. 2013–29, 2013–33 I.R.B. 141, andas modified by Rev. Proc. 2011–14, arespecial methods of accounting. In con-trast, application of the all-events test un-der a specific set of facts is not a specialmethod of accounting. See, for example,Rev. Rul. 69–314, 1969–1 C.B. 139 (con-cerning the treatment of retainages).

(e) Hybrid method of accounting is acombination of the cash and accrual meth-ods under which one or more items ofincome or expense are reported on thecash method and one or more items ofincome or expense are reported on an ac-crual method. For purposes of this section15.01, a hybrid method of accounting in-cludes, for example, a taxpayer that usesan accrual method with respect to pur-chases and sales of inventories and usesthe cash method in computing all otheritems of income and expense.

(3) Manner of making change.(a) Section 481(a) adjustment. A tax-

payer changing its method of accountingunder this section 15.01 must compute a§ 481(a) adjustment. This adjustmentmust reflect the account receivables, ac-count payables, inventory, and any otheritem determined to be necessary in orderto prevent items from being duplicated oromitted. However, the adjustment doesnot include any item of income accruedbut not received that was worthless orpartially worthless (within the meaning of

§ 166(a)) on the last day of the year im-mediately prior to the year of change.

(b) Prior change eligibility rule inap-plicable. Any prior change to the overallcash method that the taxpayer imple-mented using the provisions of Rev. Proc.2001–10, as modified by Rev. Proc. 2011–14, or Rev. Proc. 2002–28, as modified byRev. Proc. 2011–14, is disregarded forpurposes of section 5.01(1)(e) of Rev.Proc. 2015–13.

(c) Adoption of recurring item excep-tion. The taxpayer must attach to its Form3115 a statement describing the types ofliabilities for which the recurring item ex-ception will be used.

(d) Concurrent automatic change to aspecial method.

(i) Generally only one Form 3115 re-quired. Except as provided in section15.01(3)(d)(ii) of this revenue procedure,a taxpayer that is changing from the over-all cash method to an overall accrualmethod under this section 15.01 andchanging to a special method, as permittedunder section 15.01(1)(a)(ii), (iii), or (iv),must timely file a single Form 3115 forboth changes and must enter the desig-nated automatic accounting methodchange numbers for both changes on theappropriate line of that Form 3115. Forexample, a taxpayer making both a changefrom the overall cash method to an overallaccrual method under this section 15.01and an automatic change to the deferralmethod for advance payments under Rev.Proc. 2004–34 (see section 16.07 of thisrevenue procedure) must timely file a sin-gle Form 3115 for both changes and enterthe designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes.

(ii) Two Forms 3115 required when aconcurrent change is being implementedunder section 31.01 of this revenue pro-cedure for short-term obligations. When ataxpayer subject to § 1281 is changing itsmethod of accounting for interest incomeon short-term obligations as part of thechange to an overall accrual method underthis section 15.01, that taxpayer must re-quest the change for the interest incomeunder section 31.01 of this revenue pro-cedure. The taxpayer must timely file in-

May 23, 2016 Bulletin No. 2016–21940

dividual Forms 3115 for each change re-quested. This section 15.01 will governthe change to an overall accrual method.

(e) Concurrent change in accountingmethod not permitted to be implementedusing the automatic change procedures ofRev. Proc. 2015–13 and a section of thisrevenue procedure, any section of theCode or regulations, or other guidancepublished in the IRB. A taxpayer that doesnot qualify to change from the overallcash method to an overall accrual methodunder this section 15.01 because that tax-payer is concurrently changing to amethod of accounting that may not beimplemented using the automatic changeprocedures of Rev. Proc. 2015–13 and asection of this revenue procedure, any sec-tion of the Code or regulations, or otherguidance published in the IRB, musttimely request both changes using thenon-automatic change procedures in Rev.Proc. 2015–13. See Rev. Proc. 2016–1,2016–1 I.R.B. 1 (or successor), for moreinformation on whether one Form 3115 isrequired to implement the changes, andfor information on the appropriate userfee.

(4) Change made in the first § 448year.

(a) In general. If the year of change isthe first § 448 year for a taxpayer and thattaxpayer qualifies to make the changefrom the cash method under the provi-sions of §§ 1.448–1(g) and (h) as well asthis section 15.01, that taxpayer maychoose to make the change using this sec-tion 15.01. However, that taxpayer muststill comply with the requirements andprovisions of §§ 1.448–1(g) and (h) inaddition to the requirements and provi-sions of this section 15.01. For example, ifthe taxpayer is a hospital, defined in§ 1.448–1(g)(2)(ii)(B), and that taxpayerchooses to make its change from the cashmethod for the first § 448 year using thissection 15.01, the applicable § 481(a) ad-justment period is provided by § 1.448–1(g)(2)(ii). If a taxpayer chooses not toimplement its change from the cashmethod using this section 15.01, that tax-payer must make the change under theprovisions of §§ 1.448–1(g) and (h).

(b) Prior change eligibility rule inap-plicable. For a taxpayer making a changefrom the cash method in the first § 448year, any prior change to the overall cash

method is disregarded for purposes of sec-tion 5.01(1)(e) of Rev. Proc. 2015–13.

(5) Designated automatic accountingmethod change number.

(a) Change made in the first § 448year. The designated automatic account-ing method change number for a changefrom the cash method in the first § 448year is “123.” Entering designated auto-matic accounting method change number“123” on the appropriate line on the Form3115 fulfills the requirement of § 1.448–1(h)(2)(i) to type or print “AutomaticChange to Accrual Method – Section 448”at the top of page 1 of the Form 3115.

(b) All other changes from the cashmethod to an overall accrual method. Thedesignated automatic accounting methodchange number for all other changes fromthe cash method under this section 15.01is “122.”

(6) Contact information. For further in-formation regarding a change under thissection, contact Cheryl Oseekey, at (202)317-7007 (not a toll-free call).

.02 Multi-year insurance policies formulti-year service warranty contracts.


to a manufacturer, wholesaler, or retailerof motor vehicles or other durable con-sumer goods that wants to change itsmethod of accounting for insurance costspaid or incurred to insure its risks undermulti-year service warranty contracts tothe method described in section 15.02(2)of this revenue procedure. Multi-year ser-vice warranty contracts to which thischange applies include only those sepa-rately priced contracts sold by a manufac-turer, wholesaler, or retailer also sellingthe motor vehicles or other durable con-sumer goods underlying the contracts (tothe ultimate customer or to an intermedi-ary). The classification of goods as “dura-ble consumer goods” for purposes of thischange depends on the common usage ofthe goods, rather than the purchaser’s ac-tual intended use of the goods.

(b) Inapplicability. This change doesnot apply to a taxpayer that covers its risksunder its multi-year service warranty con-tracts through arrangements not constitut-ing insurance.

(2) Description of method. If a tax-payer purchases a multi-year service war-

ranty insurance policy (in connection withits sale of multi-year service warrantycontracts to customers) by paying a lump-sum premium in advance, the taxpayermust capitalize the amount paid or in-curred and may only obtain deductions forthat amount by prorating (or amortizing) itover the life of the insurance policy(whether the cash method or an accrualmethod of accounting is used to accountfor service warranty transactions).


(4) Contact information. For further in-formation regarding a change under thissection, contact Timothy Azarchs, at(202) 317-5100 (not a toll-free call).

.03 Taxpayers changing to overall cashmethod.

(1) Description of change. This changeapplies to either:

(a) a “qualifying taxpayer” that quali-fies to make the change to the overall cashreceipts and disbursements (cash) methodunder Rev. Proc. 2001–10, 2001–1 C.B.272, (other than a taxpayer described in§ 448(a)(3) or a bank described in section14.12(2)(a) of this revenue procedure)with “average annual gross receipts” (asdefined in section 5.01 of Rev. Proc.2001–10) of $1,000,000 or less that wantsto change to the overall cash method ofaccounting as provided in Rev. Proc.2001–10, as modified by Announcement2004–16, 2004–1 C.B. 668 (regardingplacement of § 481(a) adjustment on theForm 3115), and Rev. Proc. 2011–14,2011–4 I.R.B. 330 (removing § 6.02(1)(a)of Rev. Proc. 2001–10); or

(b) a “qualifying small business tax-payer” that qualifies to make a change tothe overall cash receipts and disburse-ments (cash) method under Rev. Proc.2002–28, 2002–1 C.B. 815, (other than ataxpayer prohibited from using the cashmethod under § 448 or a bank described insection 15.12(2)(a) of this revenue proce-dure) with “average annual gross receipts”(as defined in section 5.02 of Rev. Proc.2002–28) of $10,000,000 or less thatwants to change the overall method ofaccounting for an “eligible trade or busi-ness” (as defined in section 4.01 of Rev.

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Proc. 2002–28) to the overall cash methodof accounting as provided in Rev. Proc.2002–28, as modified by Announcement2004–16 (regarding placement of§ 481(a) adjustment on the Form 3115),and Rev. Proc. 2011–14 (removing§ 7.02(1)(a) of Rev. Proc. 2002–28).

(2) Manner of making change. See ei-ther Rev. Proc. 2001–10 or Rev. Proc.2002–28 for additional guidance on thecomputation of the § 481(a) adjustmentand the completion of the Form 3115.

(3) Concurrent automatic change totreat inventoriable items as nonincidentalmaterials and supplies under Rev. Proc.2001–10 or Rev. Proc. 2002–28. A tax-payer making both a change to the overallcash method under this section 15.03 anda change to treat inventoriable items asmaterials and supplies that are not inci-dental pursuant to § 1.162–3 under section22.03 of this revenue procedure for thesame year of change may file a singleForm 3115 for both changes, provided thetaxpayer enters the designated automaticaccounting method change numbers forboth changes on the appropriate line onthat Form 3115. See section 6.03(1)(b) ofRev. Proc. 2015–13, 2015–5 I.R.B. 419,for information on making concurrentchanges.

(4) Banks changing to overall cash/hybrid method. This change does not ap-ply to a bank described in section15.12(2)(a) of this revenue procedure.However, such a bank may be eligible tochange to the overall cash/hybrid methodunder section 15.12 of this revenue pro-cedure if it meets the requirements of thatsection.

(5) Farming businesses changing tooverall cash method. A farming businessmay be eligible to make this change undersection 15.03(1)(a) of this revenue proce-dure. However, a farming business is noteligible to make this change under section15.03(1)(b) of this revenue procedure. Afarming business that is not eligible underthis section 15.03 may still be eligible tochange to the overall cash method undersection 15.13 of this revenue procedure ifit meets the requirements of that section.

(6) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under section15.03(1)(a) of this revenue procedure is

“32.” The designated automatic account-ing method change number for a changeunder section 15.03(1)(b) of this revenueprocedure is “33.”

(7) Contact information. For further in-formation regarding a change under thissection, contact Megan Kirmil at (202)317-7007 (not a toll-free call).

.04 Nonaccrual-experience method.


to a taxpayer that wants to make one ormore of the changes in method of ac-counting to, from, or within a nonaccrual-experience (NAE) method of accountingthat are described in sections 3.01(1)through (5) of Rev. Proc. 2006–56,2006–2 C.B. 1169, as modified by Rev.Proc. 2011–14, 2011–4 I.R.B. 330, and asmodified and amplified by Rev. Proc.2011–46, 2011–42 I.R.B. 518.

(b) Inapplicability. This change doesnot apply to a taxpayer within the scope ofsection 3.01(6) through 3.01(8) of Rev.Proc. 2006–56, as modified and amplifiedby Rev. Proc. 2011–46.

(2) Manner of making the change.(a) Changes made with a § 481(a) ad-

justment. A change in method of account-ing described in section 3.01(1), (2), (3),or (5) of Rev. Proc. 2006–56, as modifiedand amplified by Rev. Proc. 2011–46, ismade with a § 481(a) adjustment.

(b) Changes made on a cut-off basis.(i) In general. A change described in

section 3.01(4) of Rev. Proc. 2006–56 ismade on a cut-off basis and the new ap-plicable period applies only to the taxpay-er’s NAE calculation of its uncollectibleamount for the year of change and forsubsequent years. Moreover, a change de-scribed in sections 5.02 and 5.03 of Rev.Proc. 2011–46 is made on a cut-off basisand the proposed method applies only toaccounts receivable earned on or after thefirst day of the year of change. Accord-ingly, a § 481(a) adjustment is neitherpermitted nor required for a change de-scribed in section 3.01(4) of Rev. Proc.2006–56 or in section 5.02 or 5.03 of Rev.Proc. 2011–46.

(ii) Special filing rules for changesmade under section 5.02 and 5.03 of Rev.Proc. 2011–46, as modified by this reve-nue procedure.

(A) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to a change inmethod of accounting made under section5.02 or 5.03 of Rev. Proc. 2011–46, asmodified by this revenue procedure.

(B) Filing rules. In accordance with§ 1.446–1(e)(3)(ii), the requirement of§ 1.446–1(e)(3)(i) to file a Form 3115 iswaived and a statement in lieu of a Form3115 is authorized for this change. Not-withstanding the definition of Form 3115in section 3.07 of Rev. Proc. 2015–13, thestatement in lieu of a Form 3115 that ispermitted under section 5.02 or 5.03 ofRev. Proc. 2011–46 and this section 15.04is considered a Form 3115 for purposes ofthe automatic consent procedures of Rev.Proc. 2015–13. However, the requirementto file the Duplicate copy, under section6.03(1)(a) of Rev. Proc. 2015–13, iswaived. See section 5.02 or 5.03 of Rev.Proc. 2011–46, as applicable, for whatinformation is required to be provided onthe statement.

(3) Concurrent change to overall ac-crual method and a NAE method of ac-counting. A taxpayer making both an au-tomatic change to, from, or within a NAEmethod of accounting under this section15.04 and an automatic change to an over-all accrual method under section 15.01 ofthis revenue procedure (whether or not itis the taxpayer’s first § 448 year), must filea single Form 3115 for both changes. Thetaxpayer must complete all applicable sec-tions of Form 3115, including sectionsthat apply to the change to an overallaccrual method and to the change to aNAE method, and must enter the auto-matic accounting method change numbersfor both changes on Form 3115. See sec-tion 6.03(1)(b) of Rev. Proc. 2015–13 forinformation on making concurrentchanges.

A taxpayer making both an automaticchange to, from, or within a NAE methodof accounting under this section 15.04 anda required change to an overall accrualmethod under § 448 (the taxpayer’s first§ 448 year), and is either not eligible tomake the change to an overall accrualmethod under section 15.01 of this reve-nue procedure or chooses to make thechange to an overall accrual method usingthe procedures of § 1.448–1(h)(2), must

May 23, 2016 Bulletin No. 2016–21942

make both changes (change to, from, orwithin a NAE method and change to anoverall accrual method) on a single Form3115. The taxpayer must follow the auto-matic change procedures of Rev. Proc.2015–13 and this section 15.04 for theNAE change, and the procedures of§ 1.448–1(h)(2) for the change to an over-all accrual method (except that enteringthe designated automatic accountingmethod change number “34” on the Form3115 fulfills the requirement of § 1.448–1(h)(2) to type or print “AutomaticChange to Accrual – Section 448” at thetop of page 1 of the Form 3115). Thetaxpayer must complete all applicable sec-tions of Form 3115, including sectionsthat apply to the change to an overallaccrual method and to the change to theNAE method and must enter the desig-nated automatic accounting methodchange numbers for both changes onForm 3115.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change to, from, or within aNAE method of accounting under thissection 15.04 is “35.”


.05 Interest accruals on short-termconsumer loans—Rule of 78’s method.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting from the Rule of78’s method to the constant yield methodfor stated interest (including stated inter-est that is original issue discount) onshort-term consumer loans described inRev. Proc. 83–40, 1983–1 C.B. 774,which was obsoleted by Rev. Proc. 97–37,1997–2 C.B. 455.

(2) Background.(a) A short-term consumer loan is de-

scribed in Rev. Proc. 83–40, provided:(i) the loan is a self-amortizing loan

that requires level payments, at regularintervals at least annually, over a periodnot in excess of five years (with no bal-loon payment at the end of the loan term);and

(ii) the loan agreement between theborrower and the lender provides that in-

terest is earned, or upon the prepayment ofthe loan interest is treated as earned, inaccordance with the Rule of 78’s method.

(b) In general, the Rule of 78’s methodallocates interest over the term of a loanbased, in part, on the sum of the periods’digits for the term of the loan. See Rev.Rul. 83–84, 1983–1 C.B. 97, for a de-scription of the Rule of 78’s method.

(c) In general, the constant yieldmethod allocates interest and original is-sue discount over the term of a loan basedon a constant yield. See § 1.1272–1(b) fora description of the constant yield method.The Rule of 78’s method generally front-loads interest as compared to the constantyield method.

(d) Rev. Proc. 83–40 was obsoletedbecause, under §§ 1.446–2 and 1.1272–1(which were effective for debt instrumentsissued on or after April 4, 1994), taxpay-ers generally must account for stated in-terest and original issue discount on a debtinstrument (loan) by using a constantyield method. As a result, the Rule of 78’smethod is no longer an acceptable methodof accounting for federal income tax pur-poses.



.06 Film producer’s treatment of certaincreative property costs.

(1) Description of change. This changeapplies to a taxpayer that wants to changethe method of accounting for creativeproperty costs to the safe harbor methodprovided by section 5 of Rev. Proc. 2004–36, 2004–1 C.B. 1063. This safe harbormethod of accounting applies to a tax-payer engaged in the trade of business offilm production and to creative propertycosts (as defined in section 2.01 of Rev.Proc. 2004–36) properly written off bythe taxpayer under The American Instituteof Certified Public Accountants Statementof Position (SOP) 00–2, “Accounting forProducers or Distributors of Film.”

(2) Designated automatic accountingmethod change number. The designated

automatic accounting method changenumber for a change under this section15.06 is “85.”

(3) Contact information. For further in-formation regarding a change under thissection, contact Bernard Harvey at (202)317-7005 (not a toll-free call).

.07 Deduction of incentive payments tohealth care providers.

(1) Description of change. This changeapplies to a taxpayer that wants to changeto the method of accounting for providerincentive payments under which thosepayments are included in discounted un-paid losses without regard to § 404, asprovided in Rev. Proc. 2004–41, 2004–2C.B. 90. A payment by a taxpayer to ahealth care provider is a “provider incen-tive payment,” and thus eligible for thistreatment, if (a) the taxpayer is taxable asan insurance company under Part II ofsubchapter L; (b) the payment is madepursuant to a written agreement the pur-pose of which is to encourage participat-ing health care providers to provide qual-ity health care to the taxpayer’ssubscribers in a cost-efficient manner; (c)the taxpayer’s liability for the payment isdependent on the attainment of one ormore preestablished goals during a perfor-mance period consisting of not more than12 consecutive months; (d) the terms ofthe arrangement pursuant to which thepayment is made are established unilater-ally by the taxpayer, and are not negoti-ated with the health care providers; (e) thetaxpayer normally makes payments tohealth care providers under the arrange-ment within 12 months after the close ofthe performance period; (f) deferring thereceipt of income by the health care pro-vider or otherwise providing a tax benefitto the provider is not a principal purposeof the arrangement; (g) the taxpayer re-cords a liability for the payment on itsannual statement filed for state regulatorypurposes, and includes this liability in thedetermination of discounted unpaid lossesunder § 846; and (h) the health care pro-vider is not an employee, and is not pro-viding health care as an agent, of the tax-payer. See Rev. Proc. 2004–41.


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(2) Contact information. For further in-formation regarding a change under thissection, contact Rebecca L. Baxter, at(202) 317-6995 (not a toll-free call).

.08 Change by bank for uncollectedinterest.

(1) Description of change. This changeapplies to a “bank” as defined in § 1.166–2(d)(4)(i) that: (a) uses an overall accrualmethod of accounting to determine its tax-able income for federal income tax pur-poses; (b) is subject to supervision byFederal authorities, or by state authoritiesmaintaining substantially equivalent stan-dards; (c) has uncollected interest otherthan interest described in § 1.446–2(a)(2);and (d) has six or more years of collectionexperience. Under the safe harbor methodof accounting provided by section 4 ofRev. Proc. 2007–33, 2007–1 C.B. 1289, abank determines for each taxable year theamount of uncollected interest (other thaninterest described in § 1.446–2(a)(2)) forwhich it is considered to have a reason-able expectancy of payment by multiply-ing: (a) the total accrued (determined un-der § 1.446–2) but uncollected interest forthe year, by (b) the bank’s “recovery per-centage” (determined under section 4.02of Rev. Proc. 2007–33) for that year.Solely for purposes of this safe harbor, thebank is not considered to have a reason-able expectancy of payment for the ex-cess, if any, of the accrued but uncollectedinterest over the expected collectionamount determined using the bank’s re-covery percentage. The bank includes ingross income the portion of accrued butuncollected interest for which it has a rea-sonable expectancy of payment. The bankexcludes from income the portion of ac-crued but uncollected interest for which ithas no reasonable expectancy of payment.

(2) Recovery percentage. Subject to thelimitations and conditions in Rev. Proc.2007–33, sections 4.02(2), (3), and (4), abank determines its recovery percentagefor each taxable year by dividing: (a) totalpayments that the bank received on loans(including principal and interest) duringthe 5 taxable years immediately precedingthe taxable year, by (b) total amounts thatwere due and payable to the bank on loansduring the same 5 taxable years. The re-

covery percentage cannot exceed 100 per-cent and must be calculated to at least fourdecimal places. The data used in the re-covery percentage must take into accountacquisitions and dispositions. If a bankacquires the major portion of a trade orbusiness of another person (predecessor)or the major portion of a separate unit of atrade or business of a predecessor, then inapplying Rev. Proc. 2007–33 for any tax-able year ending on or after the acquisi-tion, the data from preceding taxable yearsof the predecessor attributable to the por-tion of the trade or business acquired, ifavailable, must be used in determining thebank’s recovery percentage. If a bank dis-poses of a major portion of a trade orbusiness or the major portion of a separateunit of a trade or business, and the bankfurnished the acquiring person the infor-mation necessary for the computations re-quired by Rev. Proc. 2007–33, then inapplying the revenue procedure for anytaxable year ending on or after the dispo-sition, the data from preceding taxableyears attributable to the disposed portionof the trade or business may not be used indetermining the bank’s recovery percent-age.



.09 Change from the cash method to anaccrual method for specific items.


to a taxpayer that uses an overall accrualmethod of accounting but has identified aspecific item or items of income or ex-pense (or both) that are being accountedfor on the cash method of accounting.This change does not apply to a taxpayerthat is changing its overall method of ac-counting from cash to accrual. Such ataxpayer may be eligible to change to anoverall accrual method using section15.01 of this revenue procedure.


(i) a taxpayer that will not have allitems of income and expense on an ac-crual method subsequent to the changeunder this section 15.09;

(ii) a cooperative organization de-scribed in § 501(c)(12), 521, or 1381;

(iii) an individual taxpayer, except foractivities conducted as a sole proprietor-ship;

(iv) a taxpayer engaged in two or moretrades or businesses, unless the taxpayermakes this change so that the identicalaccrual method is used for each such tradeor business beginning with the year ofchange;

(v) a change in method of accountingfor any payment liability described in§ 1.461–4(g);

(vi) a change in the method of account-ing for interest that is not taken into ac-count under § 1.446–2;

(vii) a taxpayer that has included in its§ 481(a) adjustment any amount of de-ferred compensation that is described un-der § 457A(d)(3) that is attributable toservices performed before January 1,2009; and

(viii) any change that is specificallyprovided in another section of this reve-nue procedure.

(2) Definitions.(a) “Cash method of accounting” is the

method identified by § 446(c)(1) and§§ 1.446–1(c)(1)(i), 1.451–1(a), and1.461–1(a)(1).

(b) “Accrual method of accounting” isthe method identified by § 446(c)(2) and§§ 1.446–1(c)(1)(ii), 1.451–1(a), and1.461–1(a)(2).

(3) Additional requirements. Tochange a method of accounting under thissection 15.09, a taxpayer must attach to itscompleted Form 3115 a full and completedescription of each specific item for whichthe change in method of accounting isbeing made and how the accrual methodof accounting applies to each item, and listthe § 481(a) adjustment, if any, for eachitem associated with the change. Thechange is fully and completely describedif each income and expense item is de-scribed with specificity and how the all-events test (and the economic perfor-mance requirement, if applicable) appliesto each item is described under the factsand circumstances of the taxpayer’s tradeor business. For example, a taxpayer that

May 23, 2016 Bulletin No. 2016–21944

merely states that it is changing its ac-counting method for advertising expensesfrom the cash method to an accrualmethod, recites the regulations under§ 1.461–1(a)(2), and enters the associated§ 481(a) adjustment has failed to describefully and completely the specific item forwhich the change in method of accountingis being made. In contrast, a taxpayer thatstates that it is changing its method ofaccounting for print advertising expensesfrom the cash method of accounting to anaccrual method of accounting, describesall of the relevant facts related to the printadvertising expenses, and explains howthe all-events test applies to those factsand when economic performance occurshas fully and completely described theitem and the change. See section 6.03 ofRev. Proc. 2015–13, 2015–5 I.R.B. 419,for additional filing requirements.


(5) Contact information. For further in-formation regarding a change under thissection, contact Douglas Kim at (202)317-7003 (not a toll-free call).

.10 Multi-year service warrantycontracts.


to a manufacturer, wholesaler, or retailerof motor vehicles or other durable con-sumer goods that uses an overall accrualmethod of accounting, and wants tochange to the service warranty incomemethod described in section 5 of Rev.Proc. 97–38, 1997–2 C.B. 479. Under theservice warranty income method, a quali-fying taxpayer may, in certain specifiedand limited circumstances, include a por-tion of an advance payment related to thesale of a multi-year service warranty con-tract in gross income generally over thelife of the service warranty obligation.

(b) Inapplicability. This change doesnot apply to a taxpayer not within thescope of Rev. Proc. 97–38.

(2) Manner of making change and des-ignated automatic accounting methodchange number.

(a) This change is made on a cut-offbasis and applies only to qualified ad-

vance payments for multi-year servicewarranty contracts on or after the begin-ning of the year of change. Accordingly, a§ 481(a) adjustment is neither permittednor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–1(e)(3)(i) to file a Form 3115 is waivedand pursuant to section 6.02(2) of Rev.Proc. 2015–13, 2015–5 I.R.B. 419, a shortForm 3115 is authorized for this change.The short Form must include the follow-ing information:



(iii) Part I, line 1(a); and(iv) the information required under

section 6.03 of Rev. Proc. 97–38, exceptthat the statement under section 6.03(2)(that the taxpayer agrees to all of the termsand conditions of the revenue procedure)also should refer to Rev. Proc. 2015–13.

(3) Additional requirement. A taxpayerchanging to the service warranty incomemethod of accounting under this section15.10 must satisfy the annual reportingrequirement set forth in section 6.04 ofRev. Proc. 97–38.


(5) Contact information. For further in-formation regarding a change under thissection, contact Timothy Azarchs at (202)317-5100 (not a toll-free call).

.11 Overall cash method for specifiedtransportation industry taxpayers.

(1) Description of change. This changeapplies to a “specified transportation in-dustry taxpayer” with “average annualgross receipts” of more than $10,000,000and not in excess of $50,000,000 thatwants to change to the overall cash re-ceipts and disbursement (cash) method.

(2) Definitions. For purposes of thissection 15.11 the following definitions ap-ply:

(a) Specified transportation industrytaxpayer. A specified transportation in-dustry taxpayer is a taxpayer that satisfiesthe following criteria for the year ofchange:

(i) The taxpayer reasonably identifiesits “business” (as defined in section15.11(2)(b) below) as being described inone of the following NAICS subsectorcodes (first three digits of the six-digitNAICS codes):

(A) Air Transportation, Rail Transpor-tation, Water Transportation, TruckTransportation, Transit and Ground Pas-senger Transportation, or Scenic andSightseeing Transportation, within themeaning of NAICS subsector codes 481–485 and 487; or

(B) Support Activities for Transporta-tion within the meaning of NAICS sub-sector code 488.

(ii) The taxpayer is not prohibited fromusing the overall cash method under§ 448.

(b) Business. A taxpayer may use anyreasonable method of applying the rele-vant facts and circumstances to determineits business. A business may consist ofseveral activities, which may or may notbe related. For example, a taxpayer en-gaged in transportation activities may pro-vide various services such as transportingair cargo and then subsequently truckingthe cargo throughout a metropolitan areato warehouses and wholesale/retail stores.However, each activity within a taxpay-er’s business must individually satisfy thedescription of a NAICS subsector code insection 15.11(2)(a)(i)(A) or (B) of thisrevenue procedure. For example, a sight-seeing bus operator that sells box lunchesin connection with its tours is not a “spec-ified transportation industry taxpayer” be-cause one of the two activities of its busi-ness (food sales) does not satisfy thedescription of a NAICS subsector code insection 15.11(2)(a)(i)(A) or (B) of thisrevenue procedure. While the sightseeingtransportation activity satisfies the de-scription of the NAICS subsector code insection 15.11(2)(a)(i)(A) of this revenueprocedure, the food sales activity does notsatisfy the description of any NAICS sub-sector code in section 15.11(2)(a)(i)(A) or(B) of this revenue procedure, and thus,the taxpayer’s business fails to meet thecriteria of section 15.11(2)(a)(i). Simi-larly, a train operator who operates a din-ing car where meals are served is not a“specified transportation industry tax-payer” because one of the two activities ofits business (food service) does not satisfy

Bulletin No. 2016–21 May 23, 2016945

the description of a NAICS subsectorcode in section 15.11(2)(a)(i)(A) or (B) ofthis revenue procedure. While the railtransportation activity satisfies the de-scription of a NAICS subsector code insection 15.11(2)(a)(i)(A) of this revenueprocedure, the food service activity doesnot satisfy the description of any NAICSsubsector code in section 15.11(2)(a)(i)(A)or (B) of this revenue procedure, and thus,the taxpayer’s business fails to meet thecriteria of section 15.11(2)(a)(i).

(c) Average annual gross receipts. Ataxpayer has average annual gross receiptsof more than $10,000,000 and not in ex-cess of $50,000,000 if, for each prior tax-able year ending on or after December 31,2006, the taxpayer’s average annual grossreceipts for the three prior taxable-yearperiod ending with the applicable priortaxable year are more than $10,000,000and do not exceed $50,000,000. If a tax-payer has not been in existence for threeprior taxable years, the taxpayer must de-termine its average annual gross receiptsfor the number of years (including shorttaxable years) that the taxpayer has beenin existence. See § 448(c)(3)(A).

(d) Gross receipts. Gross receipts isdefined consistent with § 1.448–1T(f)(2)(iv). Thus, gross receipts for ataxable year equal all receipts that must berecognized under the method of account-ing actually used by the taxpayer for thattaxable year for federal income tax pur-poses. See also § 448(c)(3)(C).

(e) Aggregation of gross receipts. Forpurposes of computing gross receipts un-der section 15.11(2)(d) of this revenueprocedure, all taxpayers treated as a singleemployer under § 52(a) or (b) or § 414(m)or (o) (or that would be treated as a singleemployer under these sections if the tax-payers had employees) will be treated as asingle taxpayer. However, when transac-tions occur between taxpayers that aretreated as a single taxpayer by the previ-ous sentence, gross receipts arising fromthese transactions will not be treated asgross receipts for purposes of the averageannual gross receipts limitation. See§ 448(c)(2) and § 1.448–1T(f)(2)(ii).

(f) Treatment of short taxable year. Inthe case of a short taxable year, a taxpay-er’s gross receipts must be annualized bymultiplying the gross receipts for the shorttaxable year by 12 and then dividing the

result by the number of months in theshort taxable year. See § 448(c)(3)(B) and§ 1.448–1T(f)(2)(iii).

(g) Treatment of predecessors. Anyreference to a taxpayer in this section15.11 includes a reference to any prede-cessor of that taxpayer. See§ 448(c)(3)(D).

(h) Cash method. The “cash method” isthe method identified by § 446(c)(1) and§§ 1.446–1(c)(1)(i), 1.451–1(a), and1.461–1(a)(1).


(4) Example. Taxpayer X is an LLCand taxed for federal income tax purposesas a partnership. Taxpayer X does nothave any C corporations as partners andTaxpayer X is not a tax shelter within themeaning of § 448(d)(3). Taxpayer X’sbusiness consists of short-haul truckingamong various cities within State Y, whichsatisfies the description of the NAICSsubsector code 484. Taxpayer X deter-mines that its 3-year average annual grossreceipts for each prior taxable year endingon or after December 31, 2006, have beenmore than $10,000,000 and not in excessof $50,000,000. Taxpayer X qualifies tochange to the overall cash method usingthis section 15.11.

(5) Contact information. For further in-formation regarding a change under thissection, contact Megan Kirmil at (202)317-7007 (not a toll-free call).

.12 Change to overall cash/hybridmethod for certain banks.


to a bank described in section 15.12(2)(a)of this revenue procedure that wants tochange to an overall cash/hybrid methoddescribed in section 15.12(2)(b) of thisrevenue procedure.

(b) Inapplicability. A bank’s change toan overall cash/hybrid method under thissection 15.12 does not include any changein the accounting treatment of an item forwhich the bank uses a special method (asdescribed in section 15.12(2)(b) of thisrevenue procedure) before the change, oris required to use a special method, or willuse a special method after the change. A

bank may not change the accounting treat-ment of such an item under this section15.12. Any change in the accounting treat-ment of such an item must be made underan applicable section of this revenue pro-cedure, under the non-automatic changeprocedures of Rev. Proc. 2015–13,2015–5 I.R.B. 419, or under another guid-ance published in the Internal RevenueBulletin, as appropriate.

(2) Definitions. The following defini-tions apply for purposes of this section15.12.

(a) Bank. A bank is described in thissection 15.12(2)(a) if the bank:

(i) is a bank as defined in § 581;(ii) is an S corporation as defined in

§ 1361(a)(1), or a qualified subchapter Ssubsidiary as defined in § 1361(b)(3)(B);and

(iii) has average annual gross receipts(computed as described in section15.12(5) of this revenue procedure) not inexcess of $50,000,000.

(b) Overall cash/hybrid method. Anoverall cash/hybrid method is the use of acombination of accounting methods underwhich some items of income or expenseare reported on the cash receipts and dis-bursements method (cash method) andother items of income or expense are re-ported on methods permitted or requiredfor the accounting treatment of specialitems (special methods).

(i) Cash method. The cash method isthe method identified by § 446(c)(1) and§§ 1.446–1(c)(1)(i), 1.451–1(a), and1.461–1(a)(1).

(ii) Special methods. A few of the spe-cial methods typically used by banks in-clude those provided for the accountingtreatment of the following items: securi-ties held by a dealer in securities as de-fined in § 475(c)(1) (the mark-to-marketmethod of § 475); securities held by adealer in securities as defined in § 1.471–5(inventories maintained under § 471 and§ 1.446–1(c)(2)(i)); hedging transactions(§ 1.446–4); contracts to which § 1256applies (§ 1256); original issue discounton debt instruments (§§ 163(e) and 1271–1275); interest income (including acquisi-tion discount and original issue discount)on short-term obligations (§§ 1281–1283); and stripped debt instruments(§ 1286). For example, a bank that regu-larly purchases or originates mortgages in

May 23, 2016 Bulletin No. 2016–21946

the ordinary course of its business andengages in more than negligible sales ofthose mortgages generally is a dealer insecurities under § 475(c)(1) and§ 1.475(c)–1(c) and thus must use themark-to-market method of § 475 for mort-gages and any other securities (as definedin § 475(c)(2)) held by the bank.

(3) Additional condition of change. Tochange to an overall cash/hybrid methodunder this section 15.12, a bank mustcomply with the following additional con-dition. In addition to complying with theterms and conditions set forth in section 7of Rev. Proc. 2015–13, the bank mustkeep its books and records for the year ofchange and for subsequent taxable yearson an overall cash/hybrid method allowedby this section 15.12. This condition isconsidered satisfied if the bank reconcilesthe results obtained under the methodused in keeping its books and records andthose obtained under the method used forfederal income tax purposes pursuant tothis section 15.12 and the bank maintainssufficient records to support such recon-ciliation. See also § 1.446–1(a)(4).

(4) Additional filing requirement. Tochange to an overall cash/hybrid methodunder this section 15.12, a bank must in-clude with its completed Form 3115 adescription of each specific item of thebank’s income or expense that is affectedby the change under this section 15.12and, for each such item, identify the fol-lowing: the method of accounting underwhich the bank reports that item for fed-eral income tax purposes immediately be-fore the change; and the amount of the§ 481(a) adjustment associated withchanging that item to the cash methodunder this section 15.12.

(5) Computation of average annualgross receipts. For purposes of section15.12(2)(a)(iii) of this revenue procedure,a bank’s average annual gross receipts arecomputed as described in this section15.12(5).

(a) Average annual gross receipts. Abank has average annual gross receipts notin excess of $50,000,000 if, for each priortaxable year ending on or after December31, 2006, the bank’s average annual grossreceipts for the three prior taxable-yearperiod ending with the applicable priortaxable year do not exceed $50,000,000. Ifa bank has not been in existence for three

prior taxable years, the bank must deter-mine its average annual gross receipts forthe number of years (including short tax-able years) that the bank has been in ex-istence. See § 448(c)(3)(A).

(b) Gross receipts. Gross receipts isdefined consistent with § 1.448–1T(f)(2)(iv). Thus, gross receipts for ataxable year equal all receipts that must berecognized under the method of account-ing actually used by the bank for thattaxable year for federal income tax pur-poses. See also § 448(c)(3)(C).

(c) Aggregation of gross receipts. Forpurposes of computing gross receipts un-der section 15.12(5)(b) of this revenueprocedure, all taxpayers treated as a singleemployer under § 52(a) or (b) or § 414(m)or (o) (or that would be treated as a singleemployer under these sections if the tax-payers had employees) will be treated as asingle taxpayer (that is, a single bank).However, when transactions occur be-tween taxpayers that are treated as a singletaxpayer by the previous sentence, grossreceipts arising from these transactionswill not be treated as gross receipts forpurposes of the average annual gross re-ceipts limitation. See § 448(c)(2) and§ 1.448–1T(f)(2)(ii).

(d) Treatment of short taxable year. Inthe case of a short taxable year, a bank’sgross receipts must be annualized by mul-tiplying the gross receipts for the shorttaxable year by 12 and then dividing theresult by the number of months in theshort taxable year. See § 448(c)(3)(B) and§ 1.448–1T(f)(2)(iii).

(e) Treatment of predecessors. Anyreference to a bank or taxpayer in section15.12(5) of this revenue procedure in-cludes a reference to any predecessor ofthat bank or taxpayer. See § 448(c)(3)(D).



.13 Change to overall cash method forfarmers.

(1) Description of change.

(a) Applicability. This change appliesto a taxpayer engaged in the trade or busi-ness of farming that wants to change tothe overall cash receipts and disbursement(cash) method. If a taxpayer is engaged inmore than one trade or business, thischange applies only to the taxpayer’strade or business of farming.

(b) Inapplicability. This change doesnot apply to a taxpayer that is required touse an accrual method pursuant to § 447or prohibited from using the cash methodby § 448.

(2) Definitions.(a) Cash method of accounting is the

method defined by § 446(c)(1) and§§ 1.446–1(c)(1)(i), 1.451–1(a), and1.461–1(a)(1). See also §§ 1.61–4 and1.162–12 for specific rules relating tofarmers.

(b) The trade or business of farming isa farming business as defined by§ 263A(e)(4) and the regulations thereun-der.

(3) Manner of making change. Gener-ally, a taxpayer changing its method ofaccounting under this section 15.13 mustcompute a § 481(a) adjustment. However,if the taxpayer is changing from the cropmethod, that portion of the change is madeusing a cut-off basis under which ex-penses reported on the crop method andnot deducted prior to the year of changeare deducted in the year the related crop issold.


(5) Contact information. For further in-formation regarding a change under thissection, contact Maxine Woo-Garcia at(202) 317-7011 or Christina Glendeningat (202) 317-7003 (not a toll-free call).

.14 Nonshareholder contributions tocapital under § 118.

(1) Description of change.(a) Water and sewerage disposal utili-

ties.(i) This change applies to a regulated

public utility described in § 118(c) thatwants to change its method of accountingfor payments received from customers ascustomer connection fees, which are notcontributions to the capital of the regu-

Bulletin No. 2016–21 May 23, 2016947

lated public utility within the meaning of§ 118(c), from excluding the paymentsfrom gross income as nontaxable contri-butions to capital under § 118 to includingthe payments in gross income under § 61.See Rev. Rul. 2008–30, 2008–1 C.B.1156.

(ii) This change applies to a regulatedpublic utility described in § 118(c) thatwants to change its method of accountingfor payments or property received that arecontributions in aid of construction under§ 118(c) and § 1.118–2 and that meet therequirements of §§ 118(c)(1)(B) and118(c)(1)(C) from including the paymentsor the fair market value of the property ingross income under § 61 to excluding thepayments or the fair market value of theproperty from income as nontaxable con-tributions to capital under § 118(a).

(b) Other payments or property re-ceived. This change applies to a taxpayerthat wants to change its method of ac-counting for payments or property re-ceived (other than the payments receivedby a public utility described in § 118(c)that are addressed in section 15.14(1)(a)(i)of this revenue procedure) that do notconstitute contributions to the capital ofthe taxpayer within the meaning of § 118and the regulations thereunder, from ex-cluding the payments or the fair marketvalue of the property from gross incomeas nontaxable contributions to capital un-der § 118 to including the payments or thefair market value of the property in grossincome under § 61.

(2) Additional requirement. A taxpayerthat is making a change described in sec-tion 15.14(1)(a)(i) or (1)(b) must completeSchedule E of Form 3115 for the depre-ciable property to which the change re-lates (as well as all other relevant portionsof the Form 3115).


(4) Contact information. For further in-formation regarding a change under thissection, contact David H. McDonnell at(202) 317-4137 (not a toll-free call).

.15 Debt issuance costs.

(1) Description of change. This changeapplies to a taxpayer that wants to change

its method of accounting for capitalizeddebt issuance costs to comply with§ 1.446–5, which provides rules for allo-cating the costs over the term of the debt.This change also applies to a taxpayer thatwants to change its method of accountingfor capitalized debt issuance costs fromone permissible method to another per-missible method under the last sentence in§ 1.446–5(b)(2) if the total original issuediscount determined for purposes of§ 1.446–5 is de minimis.


(3) Contact information. For further in-formation regarding a change under thissection, contact Charles W. Culmer at(202) 317-6945 (not a toll-free number).

SECTION 16. TAXABLE YEAR OFINCLUSION (§ 451)

.01 Accrual of interest on nonperformingloans.


using an overall accrual method of ac-counting that is a bank as defined in § 581(or whose primary business is making ormanaging loans) and wants to change itsmethod of accounting to comply with§ 451 and § 1.451–1(a) for qualified statedinterest (as defined in § 1.1273–1(c)) onnonperforming loans.

(b) Section 1.451–1(a) requires incometo be accrued when all the events haveoccurred that fix the right to receive theincome and the amount thereof can bedetermined with reasonable accuracy. Ataxpayer may not stop accruing qualifiedstated interest on a nonperforming loanfor federal income tax purposes merelybecause payments on the loan are overdueby a certain length of time, such as 90days, even if a federal, state, or otherregulatory authority having jurisdictionover the taxpayer permits or requires thatthe overdue interest not be accrued forregulatory purposes.

(c) Under § 451 and § 1.451–1(a), ataxpayer must continue accruing qualifiedstated interest on any nonperforming loanuntil either (i) the loan is worthless under§ 166 and charged off as a bad debt, or (ii)

the interest is determined to be uncollect-ible. In order for interest to be determineduncollectible, the taxpayer must substan-tiate, taking into account all the facts andcircumstances, that it has no reasonableexpectation of payment of the interest.This substantiation requirement is appliedon a loan by loan basis.

(d) A taxpayer that changes its methodof accounting under this section 16.01must do so for all of its loans.

(2) Section 481(a) adjustment. In gen-eral, the § 481(a) adjustment for a methodchange under this section 16.01 representsthe amount of qualified stated interest onthe taxpayer’s nonperforming loans out-standing as of the beginning of the year ofchange that should have been accrued un-der § 451 and § 1.451–1(a) and was notaccrued. Interest for which the taxpayer,as of the beginning of the year of change,has no reasonable expectation of paymentis not taken into account in determiningthe amount of the § 481(a) adjustment.



.02 Advance rentals.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for advance rent-als (other than advance rentals subject to§ 467 and the regulations thereunder) toinclude such advance rentals in gross in-come in the taxable year received. See§ 1.61–8(b).


(3) Contact information. For further in-formation regarding a change under thissection, contact Daniel Cassano at (202)317-7011 (not a toll-free call).

May 23, 2016 Bulletin No. 2016–21948

.03 State or local income or franchisetax refunds.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that receives astate or local income or franchise tax re-fund and wants to accrue the refund in thetaxable year the taxpayer receives pay-ment or notice that the claim has beenapproved, whichever is earlier, as pro-vided in Rev. Rul. 2003–3, 2003–1 C.B.252.


(3) Contact information. For further in-formation regarding a change under thissection, contact Sandra Cheston at (202)317-7011 (not a toll-free call).

.04 Capital Cost Reduction Payments.

(1) Description of change. This changeapplies to a taxpayer that purchases motorvehicles subject to leases and assumes theassociated leases from the vehicles’ deal-ers and wants to use the safe harbormethod of accounting for capital cost re-duction (CCR) payments specified in Rev.Proc. 2002–36, 2002–1 C.B. 993.


(3) Contact information. For further in-formation regarding a change under thissection, contact Bill Ruane at (202) 317-4718 (not a toll-free call).

.05 Credit card annual fees.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for credit cardannual fees as described in Rev. Rul.2004–52, 2004–1 C.B. 973, either to amethod that satisfies the all events test inaccordance with Rev. Rul. 2004–52 or tothe Ratable Inclusion Method for CreditCard Annual Fees that is described in sec-tion 4 of Rev. Proc. 2004–32, 2004–1C.B. 988. Rev. Rul. 2004–52 holds thatcredit card annual fees are not interest forfederal income tax purposes and that such

fees are includible in income by the cardissuer when the all events test under § 451is satisfied. Rev. Proc. 2004–32 providesadditional guidance for taxpayers seekingto change their methods of accounting forsuch fees, including guidance with respectto the Ratable Inclusion Method for CreditCard Annual Fees. However, a taxpayermay make either change under this reve-nue procedure only if the taxpayer uses anoverall accrual method of accounting forfederal income tax purposes and issuescredit cards to, and receives annual feesfrom, cardholders under agreements thatallow each cardholder to use a credit cardto access a revolving line of credit tomake purchases of goods and servicesand, if so authorized, to obtain cash ad-vances.

(2) Manner of making change. In com-pleting its Form 3115 to make this change,a taxpayer must identify the specificmethod to which the taxpayer is changing.

(3) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section16.05 to a method that satisfies the allevents test in accordance with Rev. Rul.2004–52 is “80.” The designated auto-matic accounting method change numberfor a change under this section 16.05 tothe Ratable Inclusion Method for CreditCard Annual Fees is “81.”

(4) Contact information. For further in-formation regarding a change under thissection, contact Kate Sleeth at (202) 317-7053 (not a toll-free call).

.06 Credit card late fees.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for credit cardlate fees to a method that treats these feesas interest income that creates or increasesthe amount of original issue discount(OID) on the pool of credit card loans towhich the fees relate. This change is avail-able only to a taxpayer that issues creditcards allowing cardholders to access a re-volving line of credit established by thetaxpayer and that, for federal income taxpurposes, does not treat the credit cardpurchase transactions of its cardholders ascreating either debt that is given in con-sideration for the sale or exchange ofproperty (within the meaning of § 1274)

or debt that is deferred payment for prop-erty (within the meaning of § 483). SeeRev. Proc. 2004–33, 2004–1 C.B. 989,for additional guidance relating to thischange.

(2) Additional requirements. A tax-payer making this change must be able todemonstrate both of the following:

(a) the amount of any credit card latefee charged to each cardholder by the tax-payer is separately stated on the cardhold-er’s account when that fee is imposed; and

(b) under the applicable credit cardagreement governing each cardholder’suse of the credit card, no amount identi-fied as a credit card late fee is charged forproperty or for specific services per-formed by the taxpayer for the benefit ofthe cardholder.

(3) Audit protection. Any audit protec-tion provided in connection with thischange is not a determination by the Com-missioner that the taxpayer is properlyaccounting for any OID income on thatpool of credit card loans. Thus, for exam-ple, the IRS is not precluded from pursu-ing the issue of whether a taxpayer isproperly accounting for its OID income(including any OID income attributable tocredit card late fees) on its pool of creditcard loans in accordance with§ 1272(a)(6).



.07 Advance payments.


to:(i) a taxpayer using or changing to an

overall accrual method of accounting thatreceives advance payments, as defined inRev. Proc. 2004–34, 2004–1 C.B. 991, asmodified and clarified by Rev. Proc.2011–18, 2011–5 I.R.B. 443, and Rev.Proc. 2013–29, 2013–33 I.R.B. 141, andas modified by Rev. Proc. 2011–14,2011–4 I.R.B. 330, and wants to changeto either the full inclusion or deferralmethod, as described in Rev. Proc. 2004–

Bulletin No. 2016–21 May 23, 2016949

34, other than a taxpayer changing to amethod described in section 15.11 of thisrevenue procedure. See also Announce-ment 2004–48, 2004–1 C.B. 998.

(ii) a taxpayer using an overall accrualmethod of accounting that receives ad-vance payments, as defined in § 1.451–5(a)(1), and wants to change to themethod of including advance payments inincome in the taxable year of receipt. See§ 1.451–5(b)(1).

(b) Inapplicability. This change doesnot apply to a taxpayer that wants to usethe Deferral Method for payments de-scribed in section 5.02(4)(a) of Rev. Proc.2004–34 (other than allocable paymentsdescribed in section 5.02(4)(c) of Rev.Proc. 2004–34) or for payments for whicha method under section 5.02(3)(b)(i) or(iii) of Rev. Proc. 2004–34 applies. Thetaxpayer must request any such change inmethod of accounting using the non-automatic change procedures in Rev.Proc. 2015–13, 2015–5 I.R.B. 419. Seesection 8.03 of Rev. Proc. 2004–34.

(2) Concurrent automatic change to anoverall accrual method. A taxpayer mak-ing both a change to its method of ac-counting for advance payments under thissection 16.07 and a change to an overallaccrual method under section 15.01 of thisrevenue procedure for the same year ofchange must file a single Form 3115 forboth changes and enter the designated au-tomatic accounting method change num-bers for both changes on the appropriateline on that Form 3115. See section6.03(1)(b) of Rev. Proc. 2015–13 for in-formation on making concurrent changes.

(3) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under section16.07(1)(a)(i) of this revenue procedure touse the full-inclusion method is “83.” Thedesignated automatic accounting methodchange number for a change under section16.07(1)(a)(i) of this revenue procedure touse the deferral method is “84.” The des-ignated automatic accounting methodchange number for a change under section16.07(1)(a)(ii) of this revenue procedureis “216.”


.08 Credit card cash advance fees.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for credit cardcash advance fees to a method that treatsthese fees as creating or increasing origi-nal issue discount (OID) on a pool ofcredit card loans that includes the cashadvances that give rise to the fees. Thischange is available only to a taxpayer thatissues credit cards allowing cardholders toaccess a revolving line of credit estab-lished by the taxpayer both to make creditcard purchase transactions and to obtaincash advances and that, for federal incometax purposes, does not treat the credit cardpurchase transactions of its cardholders ascreating debt that is given in considerationfor the sale or exchange of property. SeeRev. Proc. 2005–47, 2005–2 C.B. 269, foradditional guidance relating to thischange.

(2) Other requirements. A taxpayermaking this change must be able to dem-onstrate both of the following:

(a) the amount of any credit card cashadvance fee charged to a cardholder bythe taxpayer is separately stated on thecardholder’s account when that fee is im-posed; and

(b) under the credit card agreementwith the cardholder, no amount identifiedas a credit card cash advance fee ischarged for property or for specific ser-vices performed by the taxpayer for thebenefit of the cardholder.

(3) Audit protection. Any audit protec-tion applicable to this change under sec-tion 8 of Rev. Proc. 2015–13, 2015–5I.R.B. 419, is not a determination by theCommissioner that the taxpayer is prop-erly accounting for any OID income onthat pool of credit card loans. Thus, forexample, the IRS is not precluded frompursuing the issue of whether, under§ 1272(a)(6), a taxpayer is correctly ac-counting for its OID income (includingany OID income attributable to credit cardcash advance fees) on its pool of creditcard loans.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under section 16.08is “94.”


.09 Retainages.


to a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting for treat-ing retainages to a method consistent withthe holding in Rev. Rul. 69–314, 1969–1C.B. 139. A taxpayer changing its methodof accounting for retainages under thissection 16.09 must treat all retainages,that is both receivables and payables, inthe same manner.

(b) Inapplicability. This change doesnot apply to retainages (receivables andpayables) for long-term contracts thatmust be accounted for under thepercentage-of-completion method (PCM)under § 460. Nor does this change applyto long-term contracts otherwise ac-counted for under the PCM or long-termcontracts accounted for under exemptpercentage-of-completion method or thecompleted contract method. For the treat-ment of retainages under such methods,see Treas. Reg. §§ 1.460–4(b)(4)(i)(A)and 1.460–4(d)(3).

(2) Manner of making change.(a) Except as provided in section

16.09(2)(b) of this revenue procedure, ataxpayer changing its method of account-ing under this section 16.09 must take intoaccount a § 481(a) adjustment.

(b) For retainages received and paid inconnection with long term contracts thatare exempt construction contracts (as de-fined in § 1.460–3(b)(1)) accounted forusing the taxpayer’s overall accrualmethod of accounting, this change is madeon a cut-off basis and applies only tolong-term contracts entered into on or af-ter the beginning of the year of change.See § 1.460–1(c)(2) for a description ofwhen a contract is treated as “enteredinto.” Accordingly, a § 481(a) adjustmentis neither permitted nor required.

(3) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section16.09 for retainages not received underlong-term contracts is “130.” The desig-

May 23, 2016 Bulletin No. 2016–21950

nated automatic method change numberfor a change under this section 16.09 forretainages received under long-term con-tracts is “217.” A taxpayer making achange under this section 16.09 that hasboth types of retainages must file a singleForm 3115 and enter both change num-bers on the appropriate line on Form 3115.

(4) Contact information. For further in-formation regarding a change under thissection, contact Peter Cohn at (202) 317-7011 (not a toll-free call).

.10 Advance payments – change inapplicable financial statements (AFS).

(1) Description of change.(a) Applicability.(i) This change applies to a taxpayer

that: (A) receives advance payments, asdefined in Rev. Proc. 2004–34, 2004–1C.B. 991, as modified and clarified byRev. Proc. 2011–18, 2011–5 I.R.B. 443,and Rev. Proc. 2013–29, 2013–33 I.R.B.141, and as modified by Rev. Proc. 2011–14, 2011–4 I.R.B. 330, (B) uses the de-ferral method described in section5.02(3)(a) of Rev. Proc. 2004–34 for in-cluding those advance payments in grossincome in accordance with its applicablefinancial statement (AFS), (C) changes themanner in which it recognizes advancepayments in revenues in its AFS, and (D)wants to change its method of accountingto use its proposed method of recognizingadvance payments in revenues in its AFSfor determining the extent to which ad-vance payments are included in gross in-come under Rev. Proc. 2004–34.

(ii) A taxpayer’s restatement of its AFSfor financial accounting presentation doesnot affect the propriety of the taxpayer’smethod of accounting for advance pay-ments in the prior taxable year(s). Thus, ifthe taxpayer uses the deferral method de-scribed in section 5.02(3)(a) of Rev. Proc.2004–34 for including advance paymentsin gross income in accordance with itsAFS (even if the AFS for that taxable yearis later restated), the taxpayer satisfies therequirement of section 16.10(1)(a)(i)(B)of this revenue procedure and may changeits method of accounting under this sec-tion if it is otherwise eligible.


(i) a taxpayer that uses a presentmethod of accounting for advance pay-

ments that is not the deferral method de-scribed in section 5.02(3)(a) of Rev. Proc.2004–34. For example, this change doesnot apply to a taxpayer that uses the fullinclusion method under section 5.01 ofRev. Proc. 2004–34;

(ii) a taxpayer that wants to change itsmethod for allocating payments undersection 5.02(4) of Rev. Proc. 2004–34.


(a) This change is made on a cut-offbasis and applies only to advance pay-ments received on or after the beginningof the year of change. Any advance pay-ments received prior to the year of changeare accounted for under the taxpayer’sformer method of accounting (that is, ac-cording to its former AFS). Accordingly,a § 481(a) adjustment is neither permittednor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–1(e)(3)(i) to file a Form 3115 is waivedand a statement in lieu of a Form 3115 isauthorized for this change. Notwithstand-ing the definition of Form 3115 in section3.07 of Rev. Proc. 2015–13, 2015–5I.R.B. 419, the statement in lieu of a Form3115 that is permitted under this section16.10 is considered a Form 3115 for pur-poses of the automatic consent proceduresof Rev. Proc. 2015–13. However, the re-quirement to file the Duplicate copy, un-der section 6.03(1)(a) of Rev. Proc. 2015–13, is waived. The statement attached tothe taxpayer’s return for the year ofchange must include the following infor-mation:

(i) the designated automatic accountingchange number for this change, which is“153;”

(ii) the taxpayer’s name and employeridentification (or social security number inthe case of an individual) for each appli-cant as would be provided had a Form3115 been required;

(iii) the year of change (both the be-ginning and ending dates);

(iv) for each applicant, identify thetype of applicable financial statement (asdefined in section 4.06 of Rev. Proc.2004–34) used by the taxpayer;

(v) a detailed and complete descriptionof each type of item affected by thechange in revenue recognition and the line

number (or schedule) where the affecteditem is reflected on the federal tax returnfor the year of change; and

(vi) a detailed description of the basisused for deferral (that is, the method thetaxpayer uses in its applicable financialstatement or how the taxpayer determinesamounts earned, as applicable) both be-fore and after the change in the revenuerecognition policy for the applicable fi-nancial statement.

(3) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) Rev. Proc. 2015–13 does notapply to this change.


(5) Special rule.(a) Background. Under § 446(e), a tax-

payer that changes its book method ofaccounting must secure the Commission-er’s consent before applying its new bookmethod of accounting for tax purposes.See also § 1.446–1(e)(2)(i). Accordingly,a taxpayer that previously elected to deferadvance payments under Rev. Proc.2004–34 is required to obtain consent un-der § 446(e) if the taxpayer subsequentlychanges its book method for the deferredadvance payments and wants to use itsnew AFS in determining the extent towhich advance payments are included ingross income under Rev. Proc. 2004–34.The IRS recognizes that some taxpayerstook the position that consent under§ 446(e) was not required in these circum-stances and changed their method of ac-counting without properly obtaining con-sent. The safe harbor described below insection 16.10(5)(b) of this revenue proce-dure is provided to reduce controversy inthis area.

(b) Safe harbor. If before January 10,2011, a taxpayer: (i) received advancepayments, as defined in Rev. Proc. 2004–34; (ii) used the deferral method describedin section 5.02(3)(a) of Rev. Proc.2004–34 for including those advance pay-ments in gross income in accordance withits AFS; (iii) changed the manner in whichadvance payments are recognized in rev-enues in its AFS; and (iv) used its newAFS method with respect to a timely filedoriginal federal income tax return in de-

Bulletin No. 2016–21 May 23, 2016951

termining the amount of advance pay-ments included in gross income under thedeferral method of Rev. Proc. 2004–34without securing the consent of the Com-missioner to that change in accordancewith § 446(e) and § 1.446–1(e)(2)(i), theIRS will not assert that the taxpayer’spresent method of accounting for advancepayments is not a proper deferral methoddescribed in section 5.02(3)(a) of Rev.Proc. 2004–34 solely on the ground thatthe taxpayer failed to obtain the consent ofthe Commissioner for that change.


(7) Contact information. For further in-formation regarding a change under thissection, contact Ronald Goldstein at (202)317-7003 (not a toll-free number).

SECTION 17. OBLIGATIONS ISSUEDAT DISCOUNT (§ 454)

.01 Series E, EE, or I U.S. savingsbonds.

(1) Description of change. This changeapplies to a taxpayer that uses the overallcash receipts and disbursements (cash)method of accounting and that wants tochange its method of accounting for inter-est income on Series E, EE, or I U.S.savings bonds. However, this change onlyapplies to a taxpayer that previously madean election under § 454 to report as inter-est income the increase in redemptionprice on a bond occurring in a taxableyear, and that now wants to report thisincome in the taxable year in which thebond is redeemed, disposed of, or finallymatures, whichever is earliest.


(a) This change is made on a cut-offbasis and is effective for any increase inredemption price occurring after the be-ginning of the year of change for all SeriesE, EE, and I U.S. savings bonds held bythe taxpayer on or after the beginning ofthe year of change. Accordingly, a§ 481(a) adjustment is neither permittednor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–

1(e)(3)(i) to file a Form 3115 is waivedand a statement in lieu of a Form 3115 isauthorized for this change. Notwithstand-ing the definition of Form 3115 in section3.07 of Rev. Proc. 2015–13, 2015–5I.R.B. 419, the statement in lieu of a Form3115 that is permitted under this section17.01 is considered a Form 3115 for pur-poses of the automatic consent proceduresof Rev. Proc. 2015–13. However, the re-quirement to file the Duplicate copy, un-der section 6.03(1)(a) of Rev. Proc. 2015–13, is waived. The statement must includethe following information:

(i) the designated automatic accountingmethod change number for this change,which is “131”;

(ii) the taxpayer’s name and employeridentification number or social securitynumber, as applicable;

(iii) the year of change (both the be-ginning and ending dates);

(iv) the Series E, EE, or I U.S. savingsbonds for which this change in accountingmethod is requested;

(v) a statement that the taxpayer willreport all interest on any U.S. savingsbonds acquired during or after the year ofchange when the interest is realized upondisposition, redemption, or final maturity,whichever is earliest; and

(vi) a statement that the taxpayer willreport all interest on the U.S. savingsbonds acquired before the year of changewhen the interest is realized upon dispo-sition, redemption, or final maturity,whichever is earliest, with the exceptionof any interest income previously reportedin prior taxable years.



SECTION 18. PREPAIDSUBSCRIPTION INCOME (§ 455)

.01 Prepaid subscription income.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that wants tochange its method of accounting for pre-

paid subscription income to the methoddescribed in § 455 and the regulationsthereunder, including an eligible taxpayerthat wants to make the “within 12months” election under § 1.455–2.


(a) This change is made on a cut-offbasis and applies only to prepaid subscrip-tion income received on or after the be-ginning of the year of change. The tax-payer must continue to account forprepaid subscription income receivedprior to the year of change under the tax-payer’s present method of accounting. Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement in § 1.455–6to file a statement requesting consent issatisfied by filing a short Form 3115 for achange under this section 18.01. The shortForm 3115 must include the followinginformation:



(iii) Part I, line 1(a);(iv) the information described in

§ 1.455–6(a), as required by § 1.455–6(b); and

(v) if the taxpayer wants to make a“within 12 months” election under§ 1.455–6(c), the information described insection § 1.455–6(c)(2).

(c) The consent granted in section 9 ofRev. Proc. 2015–13, 2015–5 I.R.B. 419,satisfies the consent required under§ 455(c)(3) and § 1.455–6(b).



SECTION 19. TAXABLE YEARINCURRED (§ 461)

In general. Applicable provisions ofthe Code, regulations and other guidancepublished in the Internal Revenue Bulletinmay prescribe the manner in which a tax-

May 23, 2016 Bulletin No. 2016–21952

payer takes into account a liability that hasbeen incurred. For example, for a taxpayerwith inventories and subject to § 263A,the taxpayer must include direct and indi-rect costs in inventory costs, which maybe recovered through cost of goods sold.See § 1.263A–1(e)(2)(i)(B). A taxpayermay not rely on any provision in thissection 19 to take a current year deductionif another applicable provision requiresthe taxpayer to take the liability into ac-count in a year other than the year in-curred.

.01 Timing of incurring liabilities foremployee compensation.

(1) Self-insured employee medical ben-efits.

(a) Description of change.(i) Applicability. This change applies to

a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting for self-insured liabilities (including any amountsnot covered by insurance, such as a “de-ductible” amount under an insurance pol-icy) relating to employee medical ex-penses (including liabilities resulting frommedical services provided to retirees andto employees who have filed claims undera workers’ compensation act) that are notpaid from a welfare benefit fund withinthe meaning of § 419(e) to a method asfollows:

(A) If the taxpayer has a liability to payan employee for medical expenses in-curred by the employee, the taxpayer willtreat the liability as incurred in the taxableyear in which the employee files the claimwith the employer. See United States v.General Dynamics Corp., 481 U.S. 239(1987), 1987–2 C.B. 134.

(B) If the taxpayer has a liability to paya 3rd party for medical services providedto its employees, the taxpayer will treatthe liability as incurred in the taxable yearin which the services are provided.

(ii) Inapplicability. This change doesnot apply to a taxpayer that is requiredunder § 263A and the regulations there-under to capitalize the costs with respectto which the taxpayer wants to change itsmethod of accounting under this section19.01(1) if the taxpayer is not capitalizingthese costs, unless the taxpayer concur-rently changes its method to capitalizethese costs in conjunction with a change

to a UNICAP method under section 12.01,12.02, 12.08, or 12.12 of this revenueprocedure (as applicable).

(b) Concurrent automatic change. Ataxpayer making both this change and achange to a UNICAP method described insection 19.01(1)(a)(ii) of this revenue pro-cedure under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for bothchanges, in which case the taxpayer mustenter the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, for informa-tion on making concurrent changes.

(c) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section19.01(1) is “42.”

(2) Bonuses.(a) Description of change.(i) Applicability. This change applies to

a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting to treatbonuses as incurred in the taxable year inwhich all events have occurred that estab-lish the fact of the liability to pay a bonusand the amount of the liability can bedetermined with reasonable accuracy (see§ 1.446–1(c)(1)(ii)). Specifically, a tax-payer may change its method of account-ing under this section 19.01(2) to one ofthe following methods:

(A) If all the events that establish thefact of the liability to pay a bonus haveoccurred by the end of the taxable year inwhich the related services are provided,and the bonus is received by the employeeno later than the 15th day of the 3rd calen-dar month after the end of the taxable yearin which the related services are provided,the taxpayer will treat the bonus liabilityas incurred in that taxable year. See Rev.Rul. 55–446, 1955–2 C.B. 531, as modi-fied by Rev. Rul. 61–127, 1961–2 C.B.36.

(B) If all the events that establish thefact of the liability to pay a bonus occur inthe taxable year subsequent to the taxableyear in which the related services are pro-vided, the taxpayer will treat the bonus

liability as incurred in such subsequenttaxable year.

(ii) Inapplicability. This change doesnot apply to a taxpayer that is requiredunder § 263A and the regulations there-under to capitalize the costs with respectto which the taxpayer wants to change itsmethod of accounting under this section19.01(2) if the taxpayer is not capitalizingthese costs, unless the taxpayer concur-rently changes its method to capitalizethese costs in conjunction with a changeto a UNICAP method under section 12.01,12.02, 12.08, or 12.12 of this revenueprocedure (as applicable).

(b) Concurrent automatic change. Ataxpayer making both this change and achange to a UNICAP method described insection 19.01(2)(a)(ii) of this revenue pro-cedure under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for bothchanges, in which case the taxpayer mustenter the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes.


(3) Vacation pay, sick pay, and sever-ance pay.

(a) Description of change.(i) Applicability. This change applies to

a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting to treatvacation pay, sick pay, and severance payas incurred in the taxable year in which allevents have occurred that establish thefact of the liability to pay vacation pay,sick pay, and severance pay and theamount of the liability can be determinedwith reasonable accuracy (see § 1.446–1(c)(1)(ii)). Specifically, a taxpayer maychange its method of accounting underthis section 19.01(3) to one of the follow-ing methods:

(A) If all the events that establish thefact of the liability to pay vacation pay,sick pay, and severance pay have occurredby the end of the taxable year in which the

Bulletin No. 2016–21 May 23, 2016953

related services are provided, the vacationpay, sick pay, and severance pay vests inthe taxable year the related services areprovided, and the vacation pay, sick pay,and severance pay is received by the em-ployee no later than the 15th day of the 3rd

calendar month after the end of the tax-able year in which the related services areprovided, the taxpayer will treat the vaca-tion pay, sick pay, and severance pay lia-bility as incurred in the taxable year inwhich the related services are provided.

(B) If all the events that establish thefact of the liability to pay vacation pay,sick pay, and severance pay occur in thetaxable year subsequent to the taxableyear in which the related services are pro-vided, the taxpayer will treat the vacationpay, sick pay, and severance pay liabilityas incurred in such subsequent taxableyear.

(ii) Inapplicability. This change doesnot apply to a taxpayer that is requiredunder § 263A and the regulations there-under to capitalize the costs with respectto which the taxpayer wants to change itsmethod of accounting under this section19.01(3) if the taxpayer is not capitalizingthese costs, unless the taxpayer concur-rently changes its method to capitalizethese costs in conjunction with a changeto a UNICAP method under section 12.01,12.02, 12.08, or 12.12 of this revenueprocedure (as applicable).

(b) Concurrent automatic change. Ataxpayer making both this change and achange to a UNICAP method described insection 19.01(3)(a)(ii) of this revenue pro-cedure under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for bothchanges, in which case the taxpayer mustenter the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes.


(4) Contact information. For further in-formation regarding a change under this

section, contact Sandra Cheston at (202)317-7011 (not a toll-free call).

.02 Timing of incurring liabilities forreal property taxes, personal propertytaxes, state income taxes, and statefranchise taxes.

(1) Background. A taxpayer using anoverall accrual method of accounting gen-erally incurs a liability in the taxable yearthat all the events have occurred that es-tablish the fact of the liability, the amountof the liability can be determined withreasonable accuracy, and economic per-formance has occurred with respect to theliability. See § 1.446–1(c)(1)(ii). Under§ 1.461–4(g)(6), if the liability of the tax-payer is to pay a tax, economic perfor-mance occurs as the tax is paid to thegovernment authority that imposed thetax.


to a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting to:

(i) treat liabilities (for which the allevents test of § 461(h)(4) is otherwisemet) for real property taxes, personalproperty taxes, state income taxes, or statefranchise taxes as incurred in the taxableyear in which the taxes are paid, under§ 461 and § 1.461–4(g)(6);

(ii) account for real property taxes, per-sonal property taxes, state income taxes,or state franchise taxes under the recurringitem exception method under § 461(h)(3)and § 1.461–5(b)(1); or

(iii) revoke an election under § 461(c)(ratable accrual election).


(i) a taxpayer’s liability for a tax sub-ject to the limitation on acceleration ofaccrual of taxes under § 461(d); or

(ii) a taxpayer that is required under§ 263A and the regulations thereunder tocapitalize the costs with respect to whichthe taxpayer wants to change its methodof accounting under this section 19.02 ifthe taxpayer is not capitalizing these costs,unless the taxpayer concurrently changesits method to capitalize these costs in con-junction with a change to a UNICAPmethod under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable).

(3) Concurrent automatic change. Ataxpayer making both this change and achange to a UNICAP method described insection 19.02(2)(b)(ii) of this revenue pro-cedure under section 12.01, 12.02, 12.08,or 12.12 of this revenue procedure (asapplicable) for the same year of changeshould file a single Form 3115 for bothchanges, in which case the taxpayer mustenter the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, for informa-tion on making concurrent changes.


(5) Contact information. For further in-formation regarding a change under thissection, contact Kari Fisher at (202) 317-5100 (not a toll-free call).

.03 Timing of incurring liabilities undera workers’ compensation act, tort,breach of contract, or violation of law.


to a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting for self-insured liabilities (including any amountsnot covered by insurance, such as a “de-ductible” amount under an insurance pol-icy) arising under any workers’ compen-sation act or out of any tort, breach ofcontract, or violation of law, to treatingthe liability for the workers’ compensa-tion, tort, breach of contract, or violationof law as being incurred in the taxableyear in which all the events have occurredthat establish the fact of the liability, theamount of the liability can be determinedwith reasonable accuracy, and payment ismade to the person to which the liability isowed. See § 461 and § 1.461–4(g)(1) and(2). If the taxpayer has self-insured liabil-ities resulting from medical services pro-vided to employees who have filed claimsunder a workers compensation act, thetaxpayer may change its method of ac-counting for those liabilities under section19.01(1) of this revenue procedure (if thetaxpayer is otherwise eligible).

May 23, 2016 Bulletin No. 2016–21954

(b) Inapplicability. This change doesnot apply to a taxpayer that is requiredunder § 263A and the regulations there-under to capitalize the costs with respectto which the taxpayer wants to change itsmethod of accounting under this section19.03 if the taxpayer is not capitalizingthese costs, unless the taxpayer concur-rently changes its method to capitalizethese costs in conjunction with a changeto a UNICAP method under section 12.01,12.02, 12.08, or 12.12 of this revenueprocedure (as applicable).

(2) Concurrent automatic change. Ataxpayer making both this change andchange to either a method provided insection 19.01(1) of this revenue procedurefor self-insured employee medical ex-penses or a UNICAP method described insection 19.03(1)(b) of this revenue proce-dure under section 12.01, 12.02, 12.08, or12.12 of this revenue procedure (as appli-cable) for the same year of change shouldfile a single Form 3115, in which case thetaxpayer must enter the designated auto-matic accounting method change numbersfor each change on the appropriate line onthat Form 3115. See section 6.03(1)(b) ofRev. Proc. 2015–13, 2015–5 I.R.B. 419,for information on making concurrentchanges.


(4) Contact information. For further in-formation regarding a change under thissection, contact Kari Fisher at (202) 317-5100 (not a toll-free call).

.04 Timing of incurring certainliabilities for payroll taxes.


to:(i) an employer using an overall ac-

crual method of accounting that wants tochange its method of accounting for:

(A) FICA and FUTA taxes to a methodconsistent with the holding in Rev. Rul.96–51, 1996–2 C.B. 36. Rev. Rul. 96–51permits an accrual method employer totake into account in Year 1, under the allevents test of § 461, its otherwise deduct-ible FICA and FUTA taxes imposed withrespect to year-end wages properly ac-

crued in Year 1, but paid in Year 2, if therequirements of the recurring item excep-tion are met; and

(B) state unemployment taxes and, inthe event the taxpayer is an employerwithin the meaning of the Railroad Retire-ment Tax Act (RRTA) (see § 3231(a)),RRTA taxes to a method under which thetaxpayer may take into account in Year 1its otherwise deductible state unemploy-ment taxes and railroad retirement taxes(if applicable) imposed with respect toyear-end wages properly accrued in Year1, but paid in Year 2, if the requirementsof the recurring item exception are met(including the requirement that, as of theend of the taxable year, all events haveoccurred that establish the fact of the lia-bility and the amount of the liability canbe determined with reasonable accuracy,see § 1.461–5(b));

(ii) an accrual method employer thatutilizes a method of accounting for FICAand FUTA taxes that is consistent with theholding in Rev. Rul. 96–51 and wants tochange its method of accounting for stateunemployment taxes and, in the event theemployer is an employer within the mean-ing of RRTA (see § 3231(a)), RRTA taxesto a method under which the taxpayer maytake into account in Year 1 its otherwisedeductible state unemployment taxes andrailroad retirement taxes (if applicable)imposed with respect to year-end wagesproperly accrued in Year 1, but paid inYear 2, if the requirements of the recur-ring item exception are met (including therequirement that, as of the end of thetaxable year, all events have occurred thatestablish the fact of the liability and theamount of the liability can be determinedwith reasonable accuracy, see § 1.461–5(b)); or

(iii) a taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting for FICAand FUTA taxes to the safe harbor methodprovided in Rev. Proc. 2008–25, 2008–1C.B. 686. Rev. Proc. 2008–25 providesthat for purposes of the recurring itemexception, a taxpayer will be treated assatisfying the requirement in § 1.461–5(b)(1)(i) for its payroll tax liability in thesame taxable year in which all events haveoccurred that establish the fact of the re-lated compensation liability and theamount of the related compensation liabil-

ity can be determined with reasonable ac-curacy.

(b) Inapplicability. This change doesnot apply to a taxpayer that is requiredunder § 263A and the regulations there-under to capitalize the costs with respectto which the taxpayer wants to change itsmethod of accounting under this sec-tion19.04 if the taxpayer is not capitaliz-ing these costs, unless the taxpayer con-currently changes its method to capitalizethese costs in conjunction with a changeto a UNICAP method under section 12.01,12.02, 12.08, or 12.12 of this revenueprocedure (as applicable).

(2) Recurring item exception. A tax-payer that previously has not changed toor adopted the recurring item exceptionfor FICA taxes, FUTA taxes, state unem-ployment taxes, and RRTA taxes (if ap-plicable) must change to the recurringitem exception method for FICA taxes,FUTA taxes, state unemployment taxes,and RRTA taxes (if applicable) as speci-fied in § 461(h)(3) as part of this change.

(3) Concurrent automatic change. Ataxpayer making both this change and achange to a UNICAP method described insection19.04(1)(b) of this revenue proce-dure under section 12.01, 12.02, 12.08, or12.12 of this revenue procedure (as appli-cable) for the same year of change shouldfile a single Form 3115 for both changes,in which case the taxpayer must enter thedesignated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, for information onmaking concurrent changes.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under section19.04(1)(a)(i) or (ii) of this revenue pro-cedure is “45.” The designated automaticaccounting method change number for achange under section 19.04(1)(a)(iii) ofthis revenue procedure is “113.”

(5) Contact information. For further in-formation regarding a change under thissection, contact Mon Lam at (202) 317-5100 (not a toll-free call).

.05 Cooperative advertising.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-

Bulletin No. 2016–21 May 23, 2016955

crual method of accounting that wants tochange its method of accounting for co-operative advertising costs to a methodconsistent with the holding in Rev. Rul.98–39, 1998–2 C.B. 198. Rev. Rul.98–39 generally provides that, under theall events test of § 461, an accrual methodmanufacturer’s liability to pay a retailerfor cooperative advertising services is in-curred in the year in which the servicesare performed, provided the manufactureris able to reasonably estimate this liability,and even though the retailer does not sub-mit the required claim form until the fol-lowing year.



.06 Timing of incurring certainliabilities for services or insurance.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that is cur-rently treating the mere execution of acontract for services or insurance as estab-lishing the fact of the liability under § 461and wants to change from that method ofaccounting for liabilities for services orinsurance to comply with Rev. Rul.2007–3, 2007–1 C.B. 350, that is, all theevents needed to establish the fact of theliability occur when (a) the event fixingthe liability, whether that be the requiredperformance or other event occurs or (b)payment is due, whichever happens earli-est.


(3) Contact information. For further in-formation regarding a change under thissection, contact Christina M. Glendeningat (202) 317-7003 (not a toll-free call).

.07 Rebates and allowances.

(1) Description of change.

(a) Applicability. This change appliesto taxpayer using an overall accrualmethod of accounting that wants tochange its method of accounting for treat-ing its liability for rebates and allowancesto the recurring item exception methodunder § 461(h)(3) and § 1.461–5.

(b) Inapplicability. This change doesnot apply to a taxpayer’s liability to pay arefund.



.08 Ratable accrual of real propertytaxes.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that wants tochange its method of accounting for realproperty taxes to the method described in§ 461(c) and § 1.461–1(c)(1) (ratable ac-crual election). This change applies to realproperty taxes that relate to a definite pe-riod of time. This change does not applyto a taxpayer’s first taxable year in whichthe taxpayer incurs real property taxes, inwhich case the change is made using theprovisions of § 1.461–1(c)(3)(i).


(a) This change is made on a cut-offbasis and applies only to real propertytaxes accrued on or after the beginning ofthe year of change. Any real propertytaxes accrued prior to the year of changeare accounted for under the taxpayer’sformer method of accounting. See§ 1.461–1(c)(6), Examples (2) – (5). Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement in § 1.461–1(c)(3)(ii) for requesting consent is satis-fied by filing a short Form 3115 for thischange. The taxpayer’s short Form 3115must include all of the following informa-tion:



(iii) Part I, line 1(a); and(iv) the information described in

§ 1.461–1(c)(3)(ii)(a) through (f).(c) The consent granted under section 9

of Rev. Proc. 2015–13, 2015–5 I.R.B.419, satisfies the consent required under§ 461(c)(2)(B) and § 1.461–1(c)(3)(ii).


(4) Contact information. For further in-formation regarding a change under thissection, contact Daniel Cassano at (202)317-7011 (not a toll-free call).

.09 California Franchise Taxes.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that wants tochange its method of accounting for Cal-ifornia franchise taxes to a method con-sistent with the holding in Rev. Rul.2003–90, 2003–2 C.B. 353. Rev. Rul.2003–90 provides that for taxable yearsbeginning on or after January 1, 2000, ataxpayer that uses an accrual method ofaccounting incurs a liability for Californiafranchise tax for federal income tax pur-poses in the taxable year following thetaxable year in which the California fran-chise tax is incurred under the Cal. Rev. &Tax Code, as amended.


(3) Contact information. For further in-formation regarding a change under thissection, contact Christina M. Glendeningat (202) 317-7003.

.10 Gift cards issued as a refund forreturned goods.


to a taxpayer using an overall accrualmethod of accounting that sells goods atretail and that wants to change its methodof accounting for gift cards (as defined bysection 4.02 of Rev. Proc. 2011–17,2011–5 I.R.B. 441) issued as a refund for

May 23, 2016 Bulletin No. 2016–21956

returned goods to treat the transaction as(1) the payment of a cash refund in theamount of the gift card, and (2) the sale ofa gift card in the amount of the gift card.

(b) Treatment of proceeds of thedeemed sale. A taxpayer must treat theproceeds of the deemed sale of a gift cardin accordance with the method of account-ing it otherwise employs for sales of giftcards.

(2) Concurrent automatic change. Ataxpayer making both this change and anautomatic change to the deferral methodfor advance payments under Rev. Proc.2004–34 (see section 16.07 of this reve-nue procedure) for the same taxable yearof change must file a single Form 3115 forboth changes and enter the designated au-tomatic accounting method change num-bers for both changes on the appropriateline on that Form 3115. See section6.03(1)(b) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, for information on makingconcurrent changes.

(3) Concurrent non-automatic change.A taxpayer making both this change andchange to a permissible method of ac-counting under § 1.451–5 for the sametaxable year of change on a single Form3115 must request this change in methodof accounting using the non-automaticprocedures in Rev. Proc. 2015–13 (or anysuccessor).



.11 Timing of incurring liabilities underthe recurring item exception to theeconomic performance rules.

(1) Description of change. This changeapplies to a taxpayer using an overall ac-crual method of accounting that wants toconform to any of the holdings in Rev.Rul. 2012–1, 2012–2 I.R.B. 255, whichclarifies the treatment of certain liabilitiesunder the recurring item exception to theeconomic performance requirement under§ 461(h)(3) by addressing the applicationof the “not material” and “better match-ing” requirements, and distinguishes con-

tracts for the provision of services frominsurance and warranty contracts.



.12 Economic performance safe harborfor ratable service contracts.

(1) Description of change. This changeapplies to an accrual method taxpayer thatwants to change its treatment of RatableService Contracts to conform to the safeharbor method provided by Rev. Proc.2015–39, 2015–33 I.R.B. 195.

(2) Certain eligibility rules temporarilyinapplicable. The eligibility rule in sec-tion 5.01(1)(f) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, does not apply to ataxpayer that wants to make a change un-der this section 19.12 for the taxpayer’sfirst, second, or third taxable year endingon or after July 30, 2015.

(3) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for changes in methods of ac-counting under this section 19.12 is“220.”

(4) Contact information. For further in-formation regarding a change under thissection, contact David Christensen or Pe-ter Ford at (202) 317-7011 (not a toll-freecall).

. 20. RENT (§ 467)

.01 Change from an improper method ofinclusion of rental income or expense toinclusion in accordance with the rentallocation.


to a taxpayer that:(i) is a party to § 467 rental agreements

(within the meaning of § 1.467–1(c)(1) forrental agreements entered into after May18, 1999, and § 467(d) for all other agree-ments); and

(ii) except as provided in section20.01(1)(b)(ii) of this revenue procedure,wants to change its method of accounting

for its fixed rent (as defined in § 1.467–1(d)(2)) to the rent allocation method pro-vided in § 1.467–1(d)(2)(iii).


(i) rental agreements for which taxpay-ers are required to use the constant rentalaccrual method described in § 1.467–(3)(a) or the proportional rental accrualmethod described in § 1.467–(2)(a) fortheir fixed rent; and

(ii) rental agreements that provide aspecific allocation of fixed rent as de-scribed in § 1.467–1(c)(2)(ii)(A)(2).

(2) Additional requirements. The tax-payer must attach to its Form 3115 a copyof one of its § 467 rental agreements to becovered by this automatic change (or atleast the pages of the agreement relatingto the manner in which rent is allocated).

(3) Audit protection limited. Any auditprotection under section 8 of Rev. Proc.2015–13, 2015–5 I.R.B. 419, does not ap-ply to this change for any § 467 rentalagreement determined by the Commis-sioner to be a disqualified leaseback orlong-term agreement described in§ 1.467–(3)(b).


(5) Contact information. For further in-formation regarding a change under thissection, contact William Ruane at (202)317-4718 (not a toll-free call).

SECTION 21. INVENTORIES (§ 471)

.01 Cash discounts.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for cash dis-counts (that is, discounts granted fortimely payment) when they approximate afair interest rate, from a method of con-sistently including the price of the goodsbefore discount in the cost of the goodsand including in gross income any dis-counts taken (the “gross invoicemethod”), to a method of reducing thecost of the goods by the cash discountsand deducting as an expense any dis-counts not taken (the “net invoicemethod”), or vice versa. See Rev. Rul.73–65, 1973–1 C.B. 216.

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(2) Computation of § 481(a) adjust-ment for changes to net invoice method. Inthe case of a taxpayer changing from thegross invoice method to the net invoicemethod, a negative § 481(a) adjustment isrequired to prevent duplications arisingfrom the fact that the gross invoicemethod reported income upon timely pay-ment for some or all of the goods thatremain in inventory, and a positive§ 481(a) adjustment is required to preventomissions arising from the fact that thegross invoice method included the invoiceprice, unadjusted for the cash discounts,of some or all goods in cost of goods soldand the discount will be earned by pay-ment in a subsequent taxable year. The net§ 481(a) adjustment is computed by de-ducting the “Applicable Discount” at thebeginning of the year of change from the“Available Discount” at the beginning ofthe year of change. The Available Dis-count is equal to the difference betweenthe accounts payable balance under thegross invoice method and the net invoicemethod. The Applicable Discount is equalto the difference between the beginninginventory value under the gross invoicemethod and the net invoice method.

Example. Taxpayer’s accounts payable balanceat the beginning of the year of change was $1,000under the gross invoice method and $980 under thenet invoice method. Taxpayer’s inventory value was$3,000 under the gross invoice method and $2,955under the net invoice method. The Available Dis-count is $20 ($1,000 – $980) and the ApplicableDiscount is $45 ($3,000 – $2,955). Thus, Taxpayer’snet § 481(a) adjustment is a negative $25 ($20 –$45).

(3) Computation of § 481(a) adjust-ment for changes to gross invoice method.In the case of a taxpayer changing fromthe net invoice method to the gross in-voice method, a positive § 481(a) adjust-ment is required to prevent omissions aris-ing from the fact that the net invoicemethod did not report income upon timelypayment for some or all of the goods thatremain in inventory, and a negative§ 481(a) adjustment is required to preventduplications arising from the fact that thenet invoice method included the invoiceprice, adjusted for the cash discounts, ofsome or all goods in cost of goods soldand the discount will be earned by pay-ment in a subsequent taxable year. The net§ 481(a) adjustment can be computed bydeducting the “Available Discount” at thebeginning of the year of change from the

“Applicable Discount” at the beginning ofthe year of change. The Available Dis-count is equal to the difference betweenthe accounts payable balance under thegross invoice method and the net invoicemethod. The Applicable Discount is equalto the difference between the beginninginventory value under the gross invoicemethod and the net invoice method.

Example. Taxpayer’s accounts payable balanceat the beginning of the year of change was $980under the net invoice method and $1,000 under thegross invoice method. Taxpayer’s inventory valuewas $2,955 under the net invoice method and $3,000under the gross invoice method. The ApplicableDiscount is $45 ($3,000 – $2,955) and the AvailableDiscount is $20 ($1,000 – $980). Thus, Taxpayer’snet § 481(a) adjustment is a positive $25 ($45 – $20).



.02 Estimating inventory “shrinkage”.

(1) Description of change. This changeapplies to a taxpayer that wants to changeto a method of accounting for estimatinginventory shrinkage in computing endinginventory, using:

(a) the “retail safe harbor method” de-scribed in section 4 of Rev. Proc. 98–29,1998–1 C.B. 857, as modified by thisrevenue procedure; or

(b) a method other than the retail safeharbor method, provided (i) the taxpayer’spresent method of accounting does notestimate inventory shrinkage, and (ii) thetaxpayer’s proposed method of account-ing (that estimates inventory shrinkage)clearly reflects income under § 446(b).

(2) Additional requirements. If the tax-payer wants to change to a method ofaccounting for inventory shrinkage otherthan the retail safe harbor method, thetaxpayer must attach to its Form 3115 astatement setting forth a detailed descrip-tion of all aspects of the proposed methodof estimating inventory shrinkage (includ-ing, for last-in, first-out (LIFO) taxpayers,the method of determining inventoryshrinkage for, or allocating inventoryshrinkage to, each LIFO pool). The direc-tor or national office subsequently may

review whether the proposed methodclearly reflects the taxpayer’s income un-der § 446(b), notwithstanding any provi-sion of Rev. Proc. 2015–13, 2015–5I.R.B. 419 (or successor). If the director orthe national office determines that the pro-posed method of accounting does notclearly reflect the taxpayer’s income, thetaxpayer will be treated as having made achange in method of accounting withoutobtaining the consent of the Commis-sioner as required by § 446(e). See sec-tions 2.01(3) and 2.03 of Rev. Proc. 2015–13.



.03 Small taxpayer exception fromrequirement to account for inventoriesunder § 471.

(1) Description of change. This changeapplies to either a taxpayer (other than ataxpayer described § 448(a)(3)) with “av-erage annual gross receipts” (as defined insection 5.01 of Rev. Proc. 2001–10, asmodified by Announcement 2004–16 (re-garding placement of § 481(a) adjustmenton the Form 3115), and Rev. Proc.2011–14 (removing § 6.02(1)(a) of Rev.Proc. 2001–10)) of $1,000,000 or less or aqualifying taxpayer (other than a taxpayerdescribed in § 448) with “average annualgross receipts” (as defined in section 5.02of Rev. Proc. 2002–28, as modified byAnnouncement 2004–16 (regardingplacement of § 481(a) adjustment on theForm 3115), and Rev. Proc. 2011–14 (re-moving § 7.02(1)(a) of Rev. Proc. 2002–28)) of $10,000,000 or less that wants tochange from a method of accounting forinventoriable items (including, if applica-ble, from the method of capitalizing costsunder § 263A) to the method described inRev. Proc. 2001–10 and Rev. Proc. 2002–28, for treating inventoriable items in thesame manner as materials and suppliesthat are not incidental under § 1.162–3.

(2) Manner of making change. SeeRev. Proc. 2001–10 or Rev. Proc.2002–28 (as applicable) for additional

May 23, 2016 Bulletin No. 2016–21958

guidance on the computation of the§ 481(a) adjustment and the completion ofthe Form 3115.

(3) Concurrent automatic change tothe overall cash method under Rev. Proc.2001–10 or Rev. Proc. 2002–28. A tax-payer making both this change and achange to the overall cash method underRev. Proc. 2001–10 or Rev. Proc.2002–28 (see section15.03 of this revenueprocedure) for the same year of changemay file a single Form 3115 for bothchanges, provided the taxpayer enters thedesignated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, for information onmaking concurrent changes.

(4) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section21.03 for the small taxpayer ($1,000,000)inventory exception contained in Rev.Proc. 2001–10 is “50.” The designatedautomatic accounting method changenumber for a change under this section21.03 for the small taxpayer($10,000,000) inventory exception con-tained in Rev. Proc. 2002–28 is “51.”


.04 Qualifying volume-related tradediscounts.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting to treat qualify-ing volume-related trade discounts as areduction in the cost of merchandise pur-chased at the time the discount is recog-nized in accordance with § 1.471–3(b). A“qualifying volume-related trade dis-count” means a discount satisfying thefollowing criteria:

(a) the taxpayer receives or earns thediscount based solely upon the purchaseof a particular volume of the merchandiseto which the discount relates;

(b) the taxpayer is neither obligated norexpected to perform or provide any ser-vices in exchange for the discount; and

(c) the discount is not a reimbursementof any expenditure incurred or to be in-curred by the taxpayer.

(2) Section 481(a) adjustment. The net§ 481(a) adjustment attributable to thechange is computed in a manner similar tothe computation of a net § 481(a) adjust-ment in the case of a change to the netinvoice method of accounting for cashdiscounts. See section 21.01(2) of this rev-enue procedure.



.05 Impermissible methods ofidentification and valuation.

(1) Description of change. This changeapplies to a taxpayer:

(a) changing from an impermissiblemethod of accounting under § 471, includ-ing a LIFO taxpayer restoring a writedown of inventory below cost or discon-tinuing maintaining an inventory reserve;

(b) changing from a method that is notin accordance with § 1.471–2(c) for deter-mining the value of “subnormal” goods;or

. (c) changing from a gross profitmethod or from a method of determiningmarket that is not in accordance with§ 1.471–4. For this purpose:

(i) Gross profit method. A gross profitmethod is a method in which the taxpayerestimates the cost of goods sold by reduc-ing its gross sales by a percentage “mark-up” from cost. The estimated cost ofgoods sold is subtracted from the sum ofthe beginning inventory and purchasesand the result is used as the ending inven-tory.

(ii) Method of determining market. Anexample of a method of determining mar-ket that is not in accordance with§ 1.471–4 is where a taxpayer, under or-dinary circumstances, determines the mar-ket value of purchased merchandise usingjudgment factors, and not using the pre-vailing current bid price on the inventorydate for the particular merchandise in the

volume in which it is usually purchasedby the taxpayer.

(2) Applicability. For purposes of thischange, a taxpayer must be changing to aninventory method (identification or valua-tion, or both) specifically permitted by theCode, the regulations, or other guidancepublished in the Internal Revenue Bulle-tin, or a decision of the United StatesSupreme Court for the inventory goods,and the taxpayer is neither prohibitedfrom using that method nor required touse a different inventory method for thoseinventory goods. This change does notapply to a change described in anothersection of this revenue procedure or inother guidance published in the InternalRevenue Bulletin.



.06 Core Alternative Valuation Method.


to a remanufacturer and rebuilder of mo-tor vehicle parts and a reseller of reman-ufactured and rebuilt motor vehicle partsthat use the cost or market, whichever islower, (LCM) inventory valuation methodto value their inventory of cores held forremanufacturing or sale and wants to usethe Core Alternative Valuation (CAV)method specified in Rev. Proc. 2003–20,2003–1 C.B. 445.

(b) Inapplicability. This change doesnot apply to a taxpayer that values itsinventory of cores at cost (including ataxpayer using the LIFO inventorymethod) unless the taxpayer concurrentlychanges (under section 6.02 of Rev. Proc.2003–20) from cost to the LCM methodfor its cores (including labor and overheadrelated to the cores in raw materials,work-in-process, and finished goods).

(2) Concurrent automatic change. Ataxpayer making both this change and (i) achange from the cost method to the LCMmethod under section 21.11 of this reve-nue procedure, or (ii) a change from theLIFO inventory method to a permitted

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method for identification under (and asdetermined and defined in) section22.01(1)(b) of this revenue procedure forthe same year of change, should file asingle Form 3115 for both changes, pro-vided the taxpayer enters the designatedautomatic accounting method changenumbers for both changes on the appro-priate line on that Form 3115. See section6.03(1)(b) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, for information on makingconcurrent changes.


(4) Contact information. For further in-formation regarding a change under thissection, contact Andrew Braden at (202)317-7007 (not a toll-free call).

.07 Replacement cost for automobiledealers’ parts inventory.

(1) Description of change. This changeapplies to a taxpayer that is engaged in thetrade or business of selling vehicle parts atretail, that is authorized under an agree-ment with one or more vehicle manufac-turers or distributors to sell new automo-biles or new light, medium, or heavy-dutytrucks, and that wants to use the replace-ment cost method described in section 4of Rev. Proc. 2002–17, 2002–1 C.B. 676,as modified by Rev. Proc. 2006–14,2006–1 C.B. 350, for its vehicle partsinventory. See Rev. Proc. 2002–17 forfurther information regarding this change.

(2) Manner of making change. Thischange is made on a cut-off basis andapplies only to the computation of endinginventories on or after the beginning ofthe year of change. Accordingly, a§ 481(a) adjustment is neither permittednor required.



.08 Replacement cost for heavyequipment dealers’ parts inventory.

(1) Description of change. This changeapplies to a heavy equipment dealer that isengaged in the trade or business of sellingheavy equipment parts at retail, that isauthorized under an agreement with oneor more heavy equipment manufacturersor distributors to sell new heavy equip-ment, and that wants to use the replace-ment cost method described in section 4of Rev. Proc. 2006–14, 2006–1 C.B. 350,for its heavy equipment parts inventory.

(2) Manner of making the change. Thischange is made on a cut-off basis andapplies only to the computation of endinginventories after the beginning of the yearof change. Accordingly, a § 481(a) adjust-ment is neither permitted nor required.

(3) Concurrent automatic change. Ataxpayer making both this change and an-other automatic change in method of ac-counting under § 263A (see section 12 ofthis revenue procedure) for the same yearof change may file a single Form 3115 forboth changes, provided the taxpayer en-ters the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115,and complies with the ordering rules of§ 1.263A–7(b)(2).



.09 Rotable spare parts.

(1) Description of change. This changeapplies to a taxpayer that is using the safeharbor method of accounting to treat itsrotable spare parts as depreciable assets inaccordance with Rev. Proc. 2007–48,2007–2 C.B. 110, as modified by this rev-enue procedure, and wants to change itsmethod of accounting to treat its rotablespare parts as inventoriable items. Thischange also applies to a taxpayer who istreating its rotable spare parts as deprecia-ble assets in a manner similar to the safeharbor method described in Rev. Proc.2007–48, and wants to change its method

of accounting to treat its rotable spareparts as inventoriable items. A taxpayerchanging its method of accounting for ro-table spare parts under this section 21.09,must use a proper inventory method toidentify and value its rotable spare parts.

(2) Eligibility rule inapplicable. Theeligibility rule in section 5.01(1)(f) ofRev. Proc. 2015–13, 2015–5 I.R.B. 419,does not apply to a taxpayer that is re-quired to make the change in method ofaccounting pursuant to section 5.06 ofRev. Proc. 2007–48.



.10 Advance Trade Discount Method.

(1) Description of change. This changeapplies to a taxpayer that wants to use theAdvance Trade Discount Method de-scribed in Rev. Proc. 2007–53, 2007–2C.B. 233.

(2) Applicability. This change inmethod of accounting applies to a tax-payer using an overall accrual method ofaccounting that is required to use an in-ventory method of accounting, that main-tains inventories as provided in § 471 andthe regulations thereunder, and that re-ceives advance trade discounts as definedin section 4.03 of Rev. Proc. 2007–53.


(4) Contact information. For further in-formation regarding a change under thissection, contact Steven Gee, at (202) 317-7007 (not a toll-free call).

.11 Permissible methods of identificationand valuation.


to a taxpayer that wants to change fromone permissible method of identifying andvaluing inventories to another permissiblemethod of identifying and valuing inven-

May 23, 2016 Bulletin No. 2016–21960

tories. For example, a taxpayer using first-in, first-out (FIFO) as its inventory-identification method may change itsinventory-valuation method from cost tocost or market, whichever is lower(LCM). (Note, however, a real estate de-veloper may not value real property orimprovements to the real property at LCMbecause real property is not inventoriableproperty under § 1.471–1. Also, a tax-payer who meets the definition of a“dealer in securities” under both§ 1.471–5 and § 475 is required to accountfor securities, as defined in § 475, under§ 475 and may not use the rules describedin § 1.471–5 for those securities.) Further-more, a taxpayer may change to a permis-sible method of valuing “subnormal”goods under § 1.471–2(c).

However, this change does not apply toany change described in another section ofthis revenue procedure or in other guid-ance published in the Internal RevenueBulletin, or to any changes within thelast-in, first-out (LIFO) inventory method.For example, this change does not applyto a taxpayer that wants to change to arolling-average method (but see section21.14 of this revenue procedure).

(b) Permissible method defined. Forpurposes of this change, a permissiblemethod is an inventory method (identifi-cation or valuation, or both) specificallypermitted for inventories by the Code, theregulations, or other guidance publishedin the Internal Revenue Bulletin, or a de-cision of the United States SupremeCourt. However, an otherwise permissibleinventory method is not permissible underthis section 21.11 for a specific taxpayer ifthat taxpayer is prohibited from using thatmethod or if that taxpayer is required touse a different method.



.12 Change in the official used vehicleguide utilized in valuing used vehicles.

(1) Description of change. Used vehi-cles taken in trade as part payment on the

sale of vehicles by a dealer may be valuedfor inventory purposes at valuations com-parable to those listed in an official usedvehicle guide as the average wholesaleprices for comparable vehicles. See Rev.Rul. 67–107, 1967–1 C.B. 115. Thischange applies to:

(a) a taxpayer that wants to changefrom not using an official used vehicleguide to using an official used vehicleguide for valuing used vehicles; or

(b) a taxpayer that wants to change to adifferent official used vehicle guide forvaluing used vehicles.



.13 Invoiced advertising associationcosts for new vehicle retail dealerships.

(1) Description of change. This changeapplies to a taxpayer that is engaged in thetrade or business of retail sales of newautomobiles or new light-duty trucks(“dealership”) that wants to discontinuecapitalizing certain advertising costs asacquisition costs under § 1.471–3(b). Thechange applies to advertising costs thatmeet the following criteria: (a) the dealer-ship must pay this advertising fee whenacquiring vehicles from the manufacturer;(b) the advertising costs are separatelycoded and included in the manufacturer’sinvoice cost of the new vehicle; (c) theadvertising cost is a flat fee per vehicle ora fixed percentage of the invoice price;and (d) the fees collected by the manufac-turer are paid to local advertising associ-ations that promote and advertise the man-ufacturer’s products in the dealership’smarket area. Under the proposed method,the dealership will exclude advertisingcosts that meet the above criteria from thecost of new vehicles and deduct the ad-vertising costs under § 162 as the adver-tising services are provided to the dealer-ship. See § 1.461–4(d)(2)(i).




.14 Rolling-average method ofaccounting for inventories.

(1) Description of change. This changeapplies to a taxpayer that uses a rolling-average method to value inventories forfinancial accounting purposes and wantsto use the same rolling-average method tovalue inventories for federal income taxpurposes in accordance with Rev. Proc.2008–43, 2008–30 C.B. 186, as modifiedby Rev. Proc. 2008–52, 2008–2 C.B. 587(see section 13).

(2) Manner of making change. Thischange is made on a cut-off basis and isapplied only to the computation of endinginventories after the beginning of the yearof change. However, if the taxpayer’sbooks and records contain sufficient infor-mation to compute a § 481(a) adjustment,the taxpayer may choose to implement thechange with a § 481(a) adjustment as pro-vided in sections 7.02 and 7.03 of Rev.Proc. 2015–13, 2015–5 I.R.B. 419.


(4) Contact information. For further in-formation regarding a change under thissection, contact Leo Nolan at (202) 317-7007 (not a toll-free call).

.15 Sales-Based Vendor Chargebacks.

(1) Description of change. Thischange, as described in Rev. Proc. 2014–33, 2014–22 I.R.B. 1060, applies to ataxpayer that wants to change its methodof accounting to treat sales-based vendorchargebacks as a reduction in cost ofgoods sold in accordance with § 1.471–3(e)(1).


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(3) Concurrent automatic changes. Ataxpayer making both this change and thechange described in section 12.11 of thisrevenue procedure for the same taxableyear of change may file a single Form3115 for both changes, provided the tax-payer enters the designated automaticchange numbers for both changes on theappropriate line on the Form 3115, andcomplies with the ordering rules of§ 1.263A–7(b)(2). See section 6.03(1)(b)of Rev. Proc. 2015–13, 2015–5 I.R.B.419, for information on making concur-rent changes.



.16 Certain changes to the costcomplement of the retail inventorymethod.

(1) Description of change. Thischange, as described in Rev. Proc. 2014–48, 2014–36 I.R.B. 527, applies to a tax-payer using the retail inventory methodthat wants to make one of the followingchanges:

(a) From adjusting to not adjusting thenumerator of the cost complement by theamount of an allowance, discount, or pricerebate that is required under § 1.471–3(e)to reduce only cost of goods sold;

(b) From adjusting to not adjusting thedenominator of the cost complement fortemporary markups and markdowns;

(c) In the case of a retail LCM tax-payer, to computing the cost complementusing a method described in § 1.471–8(b)(3), including changes from a methoddescribed in § 1.471–8(b)(3) to anothermethod described in § 1.471–8(b)(3); or

(d) In the case of a retail cost taxpayer,from not adjusting to adjusting the de-nominator of the cost complement for per-manent markups and markdowns.

(2) Effective date and certain eligibilityrule temporarily inapplicable. This sec-tion 21.16 is effective for taxable yearsbeginning after December 31, 2014. Theeligibility rule in section 5.01(1)(f) of

Rev. Proc. 2015–13, 2015–5 I.R.B. 419,does not apply for a taxpayer’s first orsecond taxable years beginning after De-cember 31, 2014.

(3) Multiple changes. A taxpayer mak-ing multiple changes under this section21.16 for the same year of change shouldfile a single Form 3115.

(4) Manner of making change. A tax-payer making a change under this section21.16 for its first or second taxable yearbeginning after December 31, 2014, mayuse either a § 481(a) adjustment as pro-vided in sections 7.02 and 7.03 of Rev.Proc. 2015–13 or implement the changeon a cut-off basis. If the taxpayer uses acut-off basis, the change applies only tothe computation of ending inventories af-ter the beginning of the year of change,and a § 481(a) adjustment is neither per-mitted nor required if a change is made ona cut-off basis.


(6) Contact information. For further in-formation regarding a change under thissection, contact Natasha M. Mulleneauxat (202) 317-7007 (not a toll-free call).

.17 Certain changes within the retailinventory method.

(1) Description of change. This changeapplies to a taxpayer using the retail in-ventory method that wants to change fromincluding to not including temporarymarkups and markdowns in determiningthe retail selling prices of goods on handat the end of the taxable year.


(3) Contact information. For further in-formation regarding a change under thissection, contact Natasha M. Mulleneauxat (202) 317-7007 (not a toll-free call).

SECTION 22. LAST-IN, FIRST-OUT(LIFO) INVENTORIES (§ 472)

.01 Change from the LIFO inventorymethod.

(1) Description of change.(a) In general. This change applies to a

taxpayer that wants to:(i) change from the LIFO inventory

method for all its LIFO inventory or forthe entire content of one or more dollar-value pools; and

(ii) change to a permitted method ormethods as determined in section22.01(1)(b) of this revenue procedure.

(b) Method to be used.(i) Determining the permitted method

to be used. A taxpayer may change to oneor more non-LIFO inventory methods forthe LIFO inventories that are the subjectof this accounting method change, butonly if the selected non-LIFO method is apermitted method for the inventory goodsto which it will be applied. For example, aheavy equipment dealer may change tothe specific identification method for newheavy equipment inventories and the re-placement cost method, as described inRev. Proc. 2006–14, 2006–1 C.B. 350,for heavy equipment parts inventories.

(ii) Permitted method defined. For pur-poses of this section 22.01, an inventorymethod (identification or valuation, orboth) is a permitted method if it is specif-ically permitted for the inventory goodsby the Code, the regulations, or otherguidance published in the Internal Reve-nue Bulletin, or a decision of the UnitedStates Supreme Court and if the taxpayeris neither prohibited from using thatmethod nor required to use a differentinventory method for those inventorygoods.

(iii) Determining permitted method.Whether an inventory method is a permit-ted method is determined without regardto the types and amounts of costs capital-ized under the taxpayer’s method of com-puting inventory cost. See § 263A and theregulations thereunder, which govern thetypes and amounts of costs required to beincluded in inventory cost for taxpayerssubject to those provisions.

(2) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply for the first

May 23, 2016 Bulletin No. 2016–21962

taxable year that the taxpayer does not orwill not comply with the requirements of§ 472(e)(2) because the taxpayer has ap-plied or will apply International FinancialReporting Standards in its financial state-ments or because the taxpayer has beenacquired by an entity that has not or willnot use the LIFO method in its financialstatements.

(3) Limitation on LIFO election. Thetaxpayer may not re-elect the LIFO inven-tory method for a period of at least fivetaxable years beginning with the year ofchange unless, based on a showing ofunusual and compelling circumstances,consent is specifically granted by theCommissioner to change the method ofaccounting at an earlier time. A taxpayerthat wants to re-elect the LIFO inventorymethod within a period of five taxableyears (beginning with the year of change)must file a Form 3115 in accordance withthe non-automatic change procedures inRev. Proc. 2015–13. A taxpayer thatwants to re-elect the LIFO inventorymethod after a period of five taxable years(beginning with the year of change) doesnot file a Form 3115 using the non-automatic change procedures in Rev.Proc. 2015–13, but, rather, must file aForm 970, Application To Use LIFO In-ventory Method, in accordance with§ 1.472–3.

(4) Effect of subchapter S election bycorporation. See section 7.03(4)(b) and(c) of Rev. Proc. 2015–13.

(5) Additional requirements. The tax-payer must complete the following state-ments and attach them to its Form 3115. Ifthe taxpayer will use different methods fordifferent inventory goods to which thechange applies, the taxpayer must com-plete the statements for each of those dif-ferent types of inventory goods.

(a) “The proposed method of identify-ing [Insert description of inventory goods]is the [Insert method, as appropriate; thatis, specific identification; FIFO; retail;etc.] method.”

(b) “The proposed method of valuing[Insert description of inventory goods] is[Insert method, as appropriate; that is,cost; LCM; etc.].”

(6) Pool split and partial termination.If a taxpayer must remove goods from aLIFO inventory pool because those goodsare not within the scope of that pool (for

example, removing resale goods from amanufacturing pool), and if the taxpayerwants to change from the LIFO inventorymethod for those removed goods, the tax-payer may split the pool pursuant to sec-tion 22.10 of this revenue procedure andthen may change from the LIFO methodpursuant to this section 22.01. See section22.10(2) of this revenue procedure. Thetaxpayer must file a separate Form 3115for each such change.

(7) Section 481(a) adjustment re-quired.

(a) General rule. A taxpayer changingfrom a LIFO inventory method must com-pute a § 481(a) adjustment for the year ofchange. See section 7.02 of Rev. Proc.2015–13.

(b) Special rule for changes that wouldotherwise be implemented on a cut-off ba-sis. If a taxpayer is changing from theLIFO inventory method to a method ofaccounting that is implemented on a cut-off basis under another section of thisrevenue procedure (see, for example, sec-tions 21.07, 21.08, and 21.14 of this rev-enue procedure), the taxpayer’s § 481(a)adjustment is “the LIFO recaptureamount” as defined in § 312(n)(4)(B) and(C). A taxpayer computing the § 481(a)adjustment under this special rule mustthen compute its ending inventory valuefor the year of change using the proposedmethod (that is, treat the deemed changefrom the first-in, first-out (FIFO) methodto the proposed method on a cut-off ba-sis).



.02 Determining current-year cost underthe LIFO inventory method.


to a taxpayer using the LIFO inventorymethod that wants to change its method ofdetermining current-year cost to:

(i) the actual cost of the goods mostrecently purchased or produced (most-recent-acquisitions method);

(ii) the actual cost of the goods pur-chased or produced during the taxableyear in the order of acquisition (earliest-acquisitions method);

(iii) the average unit cost equal to theaggregate actual cost of all the goods pur-chased or produced throughout the taxableyear divided by the total number of unitsso purchased or produced. See § 1.472–8(e)(2)(ii);

(iv) the specific identification method;or

(v) a rolling-average method if the tax-payer uses that rolling-average method inaccordance with Rev. Proc. 2008–43,2008–30 I.R.B. 186, as modified by Rev.Proc. 2008–52, 2008–36 I.R.B. 587 (seesection 13).

(b) Inapplicability. This change doesnot apply to a taxpayer using the lower ofcost or market method to determinecurrent-year cost. A taxpayer using thelower of cost or market method that val-ued inventory below cost may not changeto a proper cost valuation under this sec-tion 22.02.

(2) Manner of making change. Thischange is made using a cut-off basis andapplies only to the computations ofcurrent-year cost after the beginning ofthe year of change. Accordingly, a§ 481(a) adjustment is neither permittednor required.

(3) Concurrent change to a rolling-average method. A taxpayer making botha change to a rolling-average method ofdetermining current-year cost for its LIFOinventory under this section 22.02 and achange to a rolling-average method of ac-counting for non-LIFO inventories underRev. Proc. 2008–43 (see section 21.14 ofthis revenue procedure) should file a sin-gle Form 3115 for both changes, in whichcase the taxpayer must enter the desig-nated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, for information onmaking concurrent changes.



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section, contact Leo Nolan at (202) 317-7007 (not a toll-free call).

.03 Alternative LIFO inventory methodfor retail automobile dealers.


to a taxpayer engaged in the trade or busi-ness of retail sales of new automobiles ornew light-duty trucks (“automobiledealer”) that wants to change to the “Al-ternative LIFO method” described in sec-tion 4 of Rev. Proc. 97–36, 1997–2 C.B.450, as modified by Rev. Proc. 2008–23,2008–1 C.B. 664, for its LIFO inventoriesof new automobiles and new light-dutytrucks. Light-duty trucks are trucks with agross vehicle weight of 14,000 pounds orless, which also are referred to as class 1,2, or 3 trucks.

(b) Inapplicability. This change doesnot apply to an automobile dealer thatuses the inventory price index computa-tion (IPIC) method for goods other thannew automobiles, new light-duty trucks,parts and accessories, used automobiles,and used trucks.

(2) Manner of making change.(a) Cut-off basis. This change is made

using a cut-off basis and applies only tothe computation of ending inventories af-ter the beginning of the year of change.See section 5.03(6) of Rev. Proc. 97–36for more information regarding a cut-offbasis. Accordingly, a § 481(a) adjustmentis neither permitted nor required.

(b) Concurrent change from IPICmethod. An automobile dealer using theIPIC method that also has parts and ac-cessories, used automobiles, or used light-duty trucks (other goods) inventory mayincorporate a change, using a cut-off ba-sis, from IPIC to another acceptable LIFOmethod for those other goods into thischange. When changing from IPIC to adollar-value LIFO method for its othergoods, the automobile dealer must estab-lish separate inventory pools for new au-tomobiles and new light-duty trucks, un-less the automobile dealer alsoconcurrently changes to the Vehicle-PoolMethod (see section 22.08 of this revenueprocedure). Further, the automobile dealermust establish a separate inventory poolfor the parts and accessories. See section6.03(1)(b) of Rev. Proc. 2015–13, 2015–5

I.R.B. 419, for information on makingconcurrent changes.

(c) Additional requirements. An auto-mobile dealer also must comply with thefollowing:

(i) the conditions in section 5.03 ofRev. Proc. 97–36; and

(ii) for an automobile dealer changingfrom the IPIC method under this section22.03, the automobile dealer also mustattach to its Form 3115 a schedule settingforth the classes of goods for which theautomobile dealer has elected to use theLIFO method and the accounting methodchanges being made under this section22.03 for each class of goods.

(3) Concurrent change to the Vehicle-Pool Method. A taxpayer making both achange to the Alternative LIFO Methodunder this section 22.03 and a change tothe Vehicle-Pool Method under Rev.Proc. 2008–23 (see section 22.08 of thisrevenue procedure) should file a singleForm 3115 for both changes, in whichcase the taxpayer must enter the desig-nated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13for information on making concurrentchanges.



.04 Used vehicle alternative LIFOmethod.

(1) Description of change. This changeapplies to a taxpayer that sells used auto-mobiles and used light-duty trucks (“usedvehicle dealers”) that wants to change tothe “Used Vehicle Alternative LIFOMethod” as described in Rev. Proc. 2001–23, 2001–1 C.B. 784, as modified by An-nouncement 2004–16, 2004–1 C.B. 668,and Rev. Proc. 2008–23, 2008–1 C.B.664.

(2) Additional requirements. A tax-payer making this change must complywith the additional conditions set forth insection 5.04 of Rev. Proc. 2001–23.


on a cut-off basis, which requires that thevalue of the taxpayer’s used automobileand used light-duty truck inventory at thebeginning of the year of change must bethe same as the value of that inventory atthe end of the preceding taxable year, pluscost restorations, if any, required by sec-tion 5.04(5) of Rev. Proc. 2001–23. Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required.

(b) Bargain purchase. If the taxpayerhas previously improperly accounted for abulk bargain purchase, the taxpayer must,as part of this change, first change itsmethod of accounting to comply withHamilton Industries, Inc. v. Commis-sioner, 97 T.C. 120 (1991), and compute a§ 481(a) adjustment for that part of thechange. See Announcement 91–173,1991–47 I.R.B. 29. Upon examination, ifa taxpayer has properly changed underthis section 22.04 except for complyingwith this section 22.04(3)(b), an examin-ing agent may not deny the taxpayer thechange. However, the taxpayer does notreceive audit protection under section 8.01of Rev. Proc. 2015–13, 2015–5 I.R.B.419, with respect to the improper methodof accounting for the bargain purchase.See section 8.02(2) of Rev. Proc. 2015–13. Accordingly, the examining agentmay make any necessary adjustments inany year for which the period of limita-tions on assessment and collection of taxis open to effect compliance with Hamil-ton Industries, Inc.

(c) New base year. In effecting achange to the Used Vehicle AlternativeLIFO Method under this revenue proce-dure, the taxpayer must retain any LIFOinventory cost increments previously de-termined and the value of those incre-ments. Instead of using the earliest taxableyear for which the taxpayer adopted LIFOas the base year, the taxpayer must use theyear of change as the new base year indetermining the value of all existing LIFOcost increments for the year of change andlater taxable years. (The cumulative indexat the beginning of the year of change is1.00). The taxpayer must restate the base-year cost of all LIFO cost increments atthe beginning of the year of change interms of new base-year costs, using theyear of change as the new base year, and

May 23, 2016 Bulletin No. 2016–21964

must recompute the indexes for previ-ously determined inventory incrementsaccordingly. The new base-year cost of apool is equal to the total current-year costof all the vehicles in the pool.

(d) Form 3115. A completed Form3115 includes the completion of Part I ofSchedule C.

(4) Concurrent change from IPICmethod. A used vehicle dealer using theIPIC method that also has parts and ac-cessories, new automobiles, or new light-duty trucks (other goods) inventory mayincorporate a change, using a cut-off ba-sis, from IPIC to another acceptable LIFOmethod for those other goods into thischange. When changing from IPIC to adollar-value LIFO method for its othergoods, the used vehicle dealer must estab-lish separate inventory pools for new au-tomobiles and new light-duty trucks, un-less the used vehicle dealer alsoconcurrently changes to the Vehicle-PoolMethod (see section 22.08 of this revenueprocedure). Further, the used vehicledealer must establish a separate inventorypool for the parts and accessories. Seesection 6.03(1)(b) of Rev. Proc. 2015–13for information on making concurrentchanges.

(5) Concurrent change to the Vehicle-Pool Method. A taxpayer making both achange to the Used Vehicle AlternativeLIFO Method under this section 22.04 anda change to the Vehicle-Pool Method un-der Rev. Proc. 2008–23 (see section 22.08of this revenue procedure) should file asingle Form 3115 for both changes, inwhich case the taxpayer must enter thedesignated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13for information on making concurrentchanges.



.05 Determining the cost of usedvehicles purchased or taken as a trade-in.


to a taxpayer using the LIFO inventorymethod that wants to:

(i) determine the cost of used vehiclesacquired by trade-in using the averagewholesale price listed by an official usedvehicle guide on the date of the trade-in.See Rev. Rul. 67–107, 1967–1 C.B. 115.The taxpayer must consistently use theofficial used vehicle guide selected unlessthe taxpayer receives permission to use adifferent guide;

(ii) use a different official used vehicleguide for determining the cost of usedvehicles acquired by trade-in;

(iii) determine the cost of used vehiclespurchased for cash using the actual pur-chase price of the vehicle; or

(iv) reconstruct the beginning-of-the-year cost of used vehicles purchased forcash using values computed by nationalauto auction companies based on vehiclespurchased for cash. The national auto auc-tion company selected must be consis-tently used.

(b) Inapplicability. This change doesnot apply to a taxpayer that adopted orchanged to the Used Vehicle AlternativeLIFO Method (see section 22.04 of thisrevenue procedure).

(2) Manner of making change. Thischange is made on a cut-off basis andapplies only to used vehicles acquired onor after the beginning of the year ofchange. Accordingly, a § 481(a) adjust-ment is neither permitted nor required.



.06 Change to the inventory price indexcomputation (IPIC) method.

(1) Description of change. This changeapplies to a taxpayer that wants to change:

(a) from a non-IPIC LIFO inventorymethod to the IPIC method in accordance

with all relevant provisions of § 1.472–8(e)(3); or

(b) from the IPIC method as describedin T.D. 7814, 1982–1 C.B. 84, (March 15,1982) (the old IPIC method) to the IPICmethod as described in § 1.472–8(e)(3)(see T.D. 8976, 2002–1 C.B. 421, (Janu-ary 8, 2002)) (the new IPIC method),which includes the following requiredchanges (if applicable):

(i) from using 80% of the inventoryprice index (IPI) to using 100% of the IPIto determine the base-year cost and dollar-value of a LIFO pool(s);

(ii) from using a weighted arithmeticmean to using a weighted harmonic meanto compute an IPI for a dollar-valuepool(s); and

(iii) from using a components-of-costmethod to define inventory items to usinga total-product-cost method to define in-ventory items.

(2) Manner of making change. Thischange is made on a cut-off basis andapplies only to the computation of endinginventories after the beginning of the yearof change. Accordingly, a § 481(a) adjust-ment is neither permitted nor required.

(3) Bargain purchase. If the taxpayerhas previously improperly accounted for abulk bargain purchase, the taxpayer must,as part of this change, first change itsmethod of accounting to comply withHamilton Industries, Inc. v. Commis-sioner, 97 T.C. 120 (1991), and compute a§ 481(a) adjustment for that part of thechange. See Announcement 91–173,1991–47 I.R.B. 29. Upon examination, ifa taxpayer has properly changed underthis section 22.06 except for complyingwith section 22.06(3) of this revenue pro-cedure, an examining agent may not denythe taxpayer the change. However, thetaxpayer does not receive audit protectionunder section 8.01 of Rev. Proc. 2015–13,2015–5 I.R.B. 419, with respect to theimproper method of accounting for thebargain purchase. See section 8.02(2) ofRev. Proc. 2015–13. Accordingly, the ex-amining agent may make any necessaryadjustments in any year for which theperiod of limitations on assessment andcollection of tax is open to effect compli-ance with Hamilton Industries, Inc.

(4) Concurrent automatic changes.(a) A taxpayer making this change and

to change its method of determining

Bulletin No. 2016–21 May 23, 2016965

current-year cost under section 22.02 ofthis revenue procedure for the same yearof change may file a single Form 3115 forboth changes, provided the taxpayer en-ters the designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes.

(b) A taxpayer making this change andto change its method of pooling to IPIC-method pools described in § 1.472–8(b)(4) or § 1.472–8(c)(2) under section22.07 of this revenue procedure for thesame year of change may file a singleForm 3115, provided the taxpayer entersthe designated automatic accountingmethod change numbers for both changeson the appropriate line on that Form 3115.See section 6.03(1)(b) of Rev. Proc.2015–13 for information on making con-current changes.

(c) A taxpayer making this change andto change its method of pooling undersection 22.10 of this revenue procedurefor the same year of change may file asingle Form 3115, provided the taxpayerenters the designated automatic account-ing method change numbers for bothchanges on the appropriate line on thatForm 3115. See section 6.03(1)(b) of Rev.Proc. 2015–13 for information on makingconcurrent changes.



.07 Changes within the inventory priceindex computation (IPIC) method.

(1) Description of change. This changeapplies to a taxpayer using the IPICmethod described in § 1.472–8(e)(3) asrevised by T.D. 8976, 2002–1 C.B. 421,(new IPIC method) that wants to makeone or more of the following changes:

(a) change from the double-extensionIPIC method to the link-chain IPICmethod, or vice versa. See § 1.472–8(e)(3)(iii)(E) for principles concerningthe computation of the inventory price

index under the double-extension IPICmethod and the link-chain IPIC method;

(b) change to or from the 10 percentmethod. See § 1.472–8(e)(3)(iii)(C) forprinciples concerning the assignment ofinventory items to Bureau of Labor Sta-tistics (BLS) categories under the IPICmethod;

(c) change to IPIC-method pools de-scribed in § 1.472–8(b)(4) or § 1.472–8(c)(2), including a change to begin ordiscontinue applying one or both of the 5percent pooling rules;

(d) change to combine or separatepools as a result of the application of a 5percent pooling rule described in § 1.472–8(b)(4) or § 1.472–8(c)(2);

(e) change its selection of BLS tablefrom Table 3 (Consumer Price Index forAll Urban Consumers (CPI-U): U.S. cityaverage, detailed expenditure categories)of the monthly CPI Detailed Report toTable 9 (Producer price indexes (PPI) andpercent changes for commodity and ser-vice groupings and individual items, notseasonally adjusted) of the monthly PPIDetailed Report (formerly, Table 6), orvice versa. See § 1.472–8(e)(3)(iii)(B)(2)for principles concerning the selection ofa BLS table under the IPIC method;

(f) change the assignment of one ormore inventory items to BLS categoriesunder either Table 3 (CPI-U): U.S. Cityaverage, detailed expenditure categories)of the monthly CPI Detailed Report orTable 9 (PPI and percent changes forcommodity and service groupings and in-dividual items, not seasonally adjusted) ofthe monthly PPI Detailed Report (for-merly, Table 6). See § 1.472–8(e)(3)(iii)(C) for principles concerningthe assignment of inventory items to BLScategories under the IPIC method. As partof this change, a taxpayer may separate areassigned item from an inappropriatepool and combine the reassigned itemwith items in an appropriate pool. See§ 1.472–8(g)(2) for principles concerningthe manner of combining and separatingdollar-value pools;

(g) change the representative monthwhen necessitated because of a change intaxable year or a change in method ofdetermining current-year cost made pur-suant to section 22.02 of this revenue pro-cedure. See § 1.472–8(e)(3)(iii)(B) forprinciples concerning the determination of

a representative month under the IPICmethod. A change in method of determin-ing current-year cost and a change of therepresentative month may be made usinga single Form 3115, provided the taxpayerenters the designated automatic account-ing method change numbers for bothchanges on the appropriate line on thatForm 3115;

(h) change from using preliminaryBLS price indexes to using final BLSprice indexes to compute an inventoryprice index, or vice versa. See § 1.472–8(e)(3)(iii)(D)(2) for principles concern-ing the selection of BLS price indexesunder the IPIC method; and

(i) change from using a representativeappropriate month to using an appropriatemonth. See § 1.472–8(e)(3)(iii)(B)(3) forprinciples concerning the selection of anappropriate month.

(2) Certain eligibility rule inapplica-ble. The eligibility rule in section5.01(1)(f) of Rev. Proc. 2015–13, 2015–5I.R.B. 419, does not apply to the changesdescribed in sections 22.07(1)(d), (f) in thecase of a taxpayer using the 10 percent methoddescribed in § 1.472–8(e)(3)(iii)(C)(2), and(g) of this revenue procedure.

(3) Manner of making change.(a) Cut-off basis. These changes are

made on a cut-off basis and apply only tothe computation of ending inventories af-ter the beginning of the year of change.Accordingly, a § 481(a) adjustment is nei-ther permitted nor required.

(b) New base year. A taxpayer thatchanges pursuant to sections 22.07(1)(a),(b), and (e) of this revenue procedure mustestablish a new base year in the year ofchange.



.08 Changes to the Vehicle-PoolMethod.

(1) Description of change. This changeapplies to a retail dealer or wholesale dis-tributor (“reseller”) of cars and light-dutytrucks that wants to change to the

May 23, 2016 Bulletin No. 2016–21966

“Vehicle-Pool Method” as described inRev. Proc. 2008–23, 2008–1 C.B. 664.


on a cut-off basis and applies only to thecomputation of ending inventories afterthe beginning of the year of change. Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required. A reseller thatchanges its method of pooling under Rev.Proc. 2008–23 and this section 22.08must comply with § 1.472–8(g).

(b) New base year. Instead of using theearliest taxable year for which the reselleradopted the LIFO method for any items ina pool, the reseller must use the year ofchange as the base year when determiningthe LIFO value of that pool for the year ofchange and subsequent taxable years (thatis, the cumulative index at the beginningof the year of change is 1.00). The resellermust restate the base-year cost of all lay-ers of increment in a pool at the beginningof the year of change in terms of newbase-year cost. For an example of estab-lishing a new base year, see § 1.472–8(e)(3)(iv)(B)(1)(ii).

(3) Concurrent change to the Alterna-tive LIFO Method or the Used VehicleAlternative LIFO Method. A reseller mak-ing both a change to the Vehicle-PoolMethod under this section 22.08 and achange to the Alternative LIFO Methodunder Rev. Proc. 97–36 (see section 22.03of this revenue procedure) or the UsedVehicle Alternative LIFO Method underRev. Proc. 2001–23 (see section 22.04 ofthis revenue procedure) should file a sin-gle Form 3115 for both changes, in whichcase the taxpayer must enter the desig-nated automatic accounting methodchange numbers for both changes on theappropriate line on that Form 3115. Seesection 6.03(1)(b) of Rev. Proc. 2015–13,2015–5 I.R.B. 419, for information onmaking concurrent changes.



.09 Changes within the used vehiclealternative LIFO method.

(1) Description of change. This changeapplies to a taxpayer using the “Used Ve-hicle Alternative LIFO Method” as de-scribed in Rev. Proc. 2001–23, 2001–1C.B. 784, as modified by Announcement2004–16, 2004–1 C.B. 668, and Rev.Proc. 2008–23, 2008–1 C.B. 664, thatwants to change the particular “officialused vehicle guide” utilized by the tax-payer in connection with the Used VehicleAlternative LIFO Method or any changein the precise manner of its utilization (forexample, a change in the specific guidecategory that a taxpayer uses to representvehicles of average condition for purposesof section 4.02(5)(a) of Rev. Proc. 2001–23).


on a cut-off basis and applies only to thecomputation of ending inventories afterthe beginning of the year of change. Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required.

(b) New base year. A taxpayer thatchanges its method pursuant to this sec-tion 22.09 must establish a new base yearin the year of change.



.10 Changes to dollar-value pools ofmanufacturers.

(1) Description of change. This changeapplies to a manufacturer that:

(a) purchases goods for resale (resalegoods) and, thus, must reassign resalegoods from the pool(s) it maintains for thegoods it manufactures to one or more re-sale pools;

(b) wants to change from using multi-ple pools described in § 1.472–8(b)(3) tousing natural business unit (NBU) poolsdescribed in § 1.472–8(b)(1), or vice ver-sa; or

(c) wants to reassign items in NBUpools described in § 1.472–8(b)(1) into

the same number or a greater number ofNBU pools.

(2) Manner of making change. Thischange is made on a cut-off basis andapplies only to the computation of endinginventories after the beginning of the yearof change. Accordingly, a § 481(a) adjust-ment is neither permitted nor required. Ataxpayer that changes its method of pool-ing pursuant to this section 22.10 mustcombine or separate pools as required by§ 1.472–8(g). If a taxpayer splits a poolinto two or more permissible pools pursu-ant to this section 22.10, which must beimplemented on a cut-off basis, the tax-payer then may file a separate Form 3115to change from the LIFO inventorymethod for one or more of the resultingpools pursuant to section 22.01 of thisrevenue procedure, which must be imple-mented with a § 481(a) adjustment.



SECTION 23. MARK-TO-MARKETACCOUNTING METHOD (§ 475)

.01 Commodities dealers, securitiestraders, and commodities traderselecting to use the mark-to-marketmethod of accounting under § 475(e) or(f).

(1) Description of change. This changeapplies to certain taxpayers that haveelected to use the mark-to-market methodof accounting under § 475(e) or (f). Under§ 475(e) and (f) and Rev. Proc. 99–17,1999–1 C.B. 503, if a taxpayer makes anelection under § 475(e) or (f), then begin-ning with the first taxable year for whichthe election is effective (election year),mark to market is the only permissiblemethod of accounting for securities orcommodities subject to the election. Thus,if the electing taxpayer’s method of ac-counting for its taxable year immediatelypreceding the election year is inconsistentwith § 475, the taxpayer is required tochange its method of accounting to com-ply with the election. A taxpayer that

Bulletin No. 2016–21 May 23, 2016967

makes a § 475(e) or (f) election but fails tochange its method of accounting to com-ply with that election is using an imper-missible method. See section 4 of Rev.Proc. 99–17.

(2) Applicability. This change appliesto a taxpayer if all of the following con-ditions are satisfied:(a) the taxpayer is a commodities dealer,securities trader, or commodities traderthat has made a valid election under§ 475(e) or (f) (see section 5.03(1) of Rev.Proc. 99–17) and that is required tochange its method of accounting to com-ply with the election;(b) the method of accounting to which thetaxpayer changes is in accordance with itselection under § 475(e) or (f); and(c) the year of change is the election year.


(4) Election under Rev. Proc. 99–17.In accordance with section 5.03(1) of Rev.Proc. 99–17, to make a § 475(e) or (f)election, a taxpayer must file a statementsatisfying the requirements in section 5.04of Rev. Proc. 99–17. The taxpayer mustfile the statement not later than the duedate (without regard to any extension) ofthe original federal income tax return forthe taxable year immediately precedingthe election year and must attach the state-ment either to that return or, if applicable,to a request for an extension of time to filethat return. For example, if a calendar yearindividual taxpayer wants to make a§ 475(e) or (f) election for 2014 (the elec-tion year), the taxpayer must file the state-ment on or before April 15, 2014, with thetaxpayer’s timely filed (without regard toany extension) federal income tax returnfor 2013 or the taxpayer’s timely filedrequest for an extension of time to file the2013 federal income tax return. On theForm 3115 filed for the year of change, ataxpayer should indicate that the taxpayerhas filed the statement in compliance withsection 5.03(1) of Rev. Proc. 99–17.



section, contact Eric E. Boody at (202)317-6945 (not a toll-free call).

.02 Taxpayers requesting to change theirmethod of accounting from the mark-to-market method of accounting describedin § 475 to a realization method.

(1) Description of change. This changeapplies to any taxpayer requesting permis-sion to change its method of accountingfor securities or commodities as defined in§ 475 from the mark-to-market method ofaccounting described in § 475 to a real-ization method of accounting. For exam-ple, this section 23.02 applies when a tax-payer is required to change its method ofaccounting to a realization method afterrevoking an election under § 475(e),(f)(1), or (f)(2).

(2) Exclusive procedure. The proce-dure set forth in this section 23.02 is theexclusive procedure for changing a tax-payer’s method of accounting from themark-to-market method described in§ 475 to a realization method. Thus, filingthe Notification Statement described insection 23.02(6) of this revenue procedureis the exclusive manner of revoking a§ 475(e), (f)(1), or (f)(2) election. More-over, any taxpayer requesting permissionto change to a realization method mustfollow the procedures described in thissection 23.02 and other applicable provi-sions of Rev. Proc. 2015–13, 2015–5I.R.B. 419, to request consent to changeits method of accounting for securitiesdescribed in § 475(c)(2) (Section 475 Se-curities), commodities described in§ 475(e)(2) (Section 475 Commodities),or both.

(3) Applicability. This change appliesto a taxpayer if all of the following con-ditions in paragraphs (a) through (c) be-low are satisfied:

(a) the taxpayer is using, properly orimproperly, the mark-to-market methodof accounting described in § 475;

(b) the taxpayer is requesting permis-sion to change to a realization method ofaccounting and report gains or losses fromthe disposition of Section 475 Securities,Section 475 Commodities, or both, under§ 1001; and

(c) the taxpayer meets the requirementsof this section 23.02, including the re-quirement that it timely file the Notifica-

tion Statement described in section23.02(6) of this revenue procedure.


(5) Manner of making change. Thischange is made using a cut-off basis andapplies only to Section 475 Securities,Section 475 Commodities, or both, thatare accounted for using the mark-to-market method of accounting described in§ 475 and for which a change in method isrequested under this section 23.02. Ac-cordingly, a § 481(a) adjustment is neitherpermitted nor required.

Under the cut-off basis, a taxpayermust make a final mark of all Section 475Securities, Section 475 Commodities, orboth, that are being marked to market andthat are the subject of the accountingmethod change being requested, on thelast business day of the year preceding theyear of change. As a result of the finalmark, gain or loss attributable to thosesecurities and commodities is also recog-nized on the last business day of the yearpreceding the year of change. In the caseof any Section 475 Security or Section475 Commodity that a taxpayer holds onthe first day of the year of change, thetaxpayer must make proper adjustment inthe amount of any subsequently realizedgain or loss to take into account adjust-ments for the gain or loss recognized priorto the first day of the year of changepursuant to the use of the mark-to-marketmethod of accounting described in § 475in order to prevent amounts from beingduplicated or omitted. Any change invalue on or after the first day of the year ofchange will be taken into account using arealization method of accounting unlesssection 23.02(7) of this revenue procedurepermits the taxpayer to resume a mark-to-market method and the taxpayer resumesa mark-to-market method.

(6) Notification Statement required. Inaddition to filing the Form 3115 requiredunder section 6.03(1) of Rev. Proc. 2015–13, to change to a realization method ofaccounting under this section 23.02, a tax-payer must also file a Notification State-ment that satisfies the requirements in sec-tion 23.02(6) of this revenue procedure.The Notification Statement must be filed

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not later than the due date (without regardto any extension) of the original federalincome tax return for the taxable yearimmediately preceding the year of changeand must be attached either to that returnor, if applicable, to a request for an exten-sion of time to file that return.

(a) Notification Statement contents.The Notification Statement must contain(1) the name of the taxpayer that willchange its method of accounting (that is,the applicant), and, if applicable, the filer(for example, its parent corporation); (2) astatement that the taxpayer is requestingto change its method of accounting fromthe mark-to-market method of accountingdescribed in § 475 to a realization method;(3) the year of change (both the beginningand ending dates); and (4) the types ofinstruments subject to the method change,that is, Section 475 Securities, Section475 Commodities, or both. If a taxpayerhas made an election under § 475(e),(f)(1), or (f)(2), the taxpayer must alsoinclude a statement revoking the taxpay-er’s section 475 election or elections forthe Section 475 Securities, Section 475Commodities, or both, for which a changein accounting method is sought.

(b) Effect of filing Notification State-ment. Once the taxpayer files a Notifica-tion Statement for the year of change, arealization method of accounting is theonly permissible method of accounting forSection 475 Securities, Section 475 Com-modities, or both, described in the Notifi-cation Statement for the entire year ofchange and all subsequent years (unlesssection 23.02(7)(a) of this revenue proce-dure applies). A taxpayer that files theNotification Statement described in thissection 23.02 but fails to change itsmethod of accounting using the proce-dures described in Rev. Proc. 2015–13and this section 23.02 is using an imper-missible method.

(c) Limited § 301.9100 relief. Section301.9100 relief for failure to comply withthe requirements of this section 23.02(6)will be granted only in unusual and com-pelling circumstances.

(7) Additional requirements.(a) Resuming the mark-to-market

method of accounting. A taxpayer may notuse the automatic change procedures inRev. Proc. 2015–13 and section 23.01 ofthis revenue procedure to resume using

the mark-to-market method of accountingdescribed in § 475 for the Section 475Securities, Section 475 Commodities, orboth, that are the subject of the methodchange being requested using this section23.02 during any of the five taxable yearsbeginning with the year of change. Toresume using the mark-to-market methodof accounting described in § 475 duringthis 5-year period, a taxpayer must: (i)request the change using the non-automatic change procedures in Rev.Proc. 2015–13, (ii) request the change bythe date an election for the year of changewould be due under section 5.03 of Rev.Proc. 99–17, 1999–1 C.B. 503, and (iii)include a statement that satisfies all appli-cable requirements of section 5.04 of Rev.Proc. 99–17.

(b) Copy of Notification Statement. Ataxpayer must attach a copy of the Noti-fication Statement required in section23.02(6) of this revenue procedure to itsForm 3115 filed under this section 23.02.

(c) No audit protection for valuation. Ataxpayer does not receive audit protectionunder section 8.01 of Rev. Proc. 2015–13for the method of valuation used by thetaxpayer to determine the fair marketvalue of the taxpayer’s Section 475 Secu-rities, Section 475 Commodities, or both,for a taxable year prior to the year ofchange, or for a failure to comply with therequirements in Rev. Proc. 99–17 to prop-erly elect the mark-to-market method. Seesection 8.02(2) of Rev. Proc. 2015–13.

(8) Designated automatic accountingmethod change number. The designatedautomatic accounting method changenumber for a change under this section23.02 is “218”.

(9) Contact information. For further in-formation regarding a change under thissection, contact Eric E. Boody at (202)317-6945 (not a toll-free call).

SECTION 24. BANK RESERVES FORBAD DEBTS (§ 585)

.01 Changing from the § 585 reservemethod to the § 166 specific charge-offmethod.


to a bank (as defined in § 581, including abank for which a qualified subchapter Ssubsidiary (Qsub) election is filed) that

wants to change its method of accountingfor bad debts from the § 585 reservemethod to the § 166 specific charge-offmethod.

(b) Inapplicability. This change doesnot apply to a large bank as defined in§ 585(c)(2).

(2) Certain eligibility rule inapplica-ble. A bank that changed from the § 593reserve method under § 593(g) to the§ 585 reserve method is not prohibitedunder section 5.01(1)(f) of Rev. Proc.2015–13, 2015–5 I.R.B. 419, from chang-ing its method of accounting for bad debtsunder this section 24.01 solely because ofthe § 593(g) change. A bank for which aQsub election is filed will not be prohib-ited under section 5.01(1)(f) of Rev. Proc.2015–13 from changing its method of ac-counting for bad debts under this section24.01 solely because of the deemed liqui-dation of the bank arising from a Qsubelection.

(3) Section 481(a) adjustment. Gener-ally, the amount of the § 481(a) adjust-ment for a change in method of account-ing under this section 24.01 is the amountof the bank’s reserve for bad debts as ofthe close of the taxable year immediatelybefore the year of change. However, theamount of the § 481(a) adjustment doesnot include the amount of a bank’s pre-1988 reserves (as described in§ 593(g)(2)(A)(ii), without taking into ac-count § 593(g)(2)(B)) if the bank changedin a prior year from the § 593 reservemethod to the § 585 reserve method and§ 593(g) applied to that change. Thedeemed liquidation of a bank occurringsolely because its parent makes a Qsubelection does not accelerate the § 481(a)adjustment. In accordance with section7.03(4)(a) of Rev. Proc. 2015–13, a bankthat ceases to be a bank under § 581 mustaccelerate its § 481(a) adjustment.

(4) Change from § 585 required whenelecting S corporation status.

(a) General rule. A bank electing Scorporation status (or a bank for which aQsub election is filed) cannot use the§ 585 reserve method. The filing by abank of a Form 2553, Election by a SmallBusiness Corporation, or the filing by abank’s parent of Form 8869, QualifiedSubchapter S Subsidiary Election, withrespect to the bank will constitute anagreement by the bank to change its

Bulletin No. 2016–21 May 23, 2016969

method of accounting for bad debts fromthe § 585 reserve method to the § 166specific charge-off method effective as ofthe taxable year for which the S corpora-tion election or Qsub election is effective(year of change) in accordance with all ofthe automatic change procedures of Rev.Proc. 2015–13 and this section 24.01. Theresulting § 481(a) adjustment is recog-nized built-in gain under § 1374, unlessthe bank elects under § 1361(g) and sec-tion 24.01(4)(b) of this revenue procedureto take the § 481(a) adjustment into ac-count in determining taxable income forthe taxable year immediately precedingthe year of change. See § 1.1374–4(d).

(b) Election to include § 481(a) adjust-ment in taxable year immediately preced-ing the year of change.

(i) Election requirements. A bank thatchanges its method of accounting for baddebts under this section 24.01, from the§ 585 reserve method to the § 166 specificcharge-off method for the first taxableyear for which the bank’s S corporationelection is effective (year of change) mayelect under § 1361(g) to take into accountthe amount of the resulting § 481(a) ad-justment in determining taxable incomefor the taxable year immediately preced-ing the year of change. To make this elec-tion, a bank must (1) file an original andcopy of Form 3115 under section 6.03(1)of Rev. Proc. 2015–13 (and any othercopy required under section 6.03) for theyear of change, (2) file an additional copyof the Form 3115 with its original (oramended) federal income tax return forthe taxable year immediately precedingthe year of change filed no later than thedate the original Form 3115 is properlyfiled under section 6.03(1) of Rev. Proc.2015–13 (and any other copy required un-der section 6.03) and (3) include theamount of the § 481(a) adjustment ingross income for the taxable year imme-diately preceding the year of change. Thebank must attach a statement to the orig-inal and both copies of Form 3115 statingthat the bank elects under § 1361(g) totake the § 481(a) adjustment into accountin determining taxable income for the tax-able year immediately preceding the yearof change.

(ii) Special rule for Qsub banks. In thecase of a Qsub bank, the S corporationparent must file an original and copy of

Form 3115 under section 6.03(1) of Rev.Proc. 2015–13 for the year of change. TheQsub bank must file an additional copy ofthe Form 3115 with its original (oramended) federal income tax return forthe taxable year immediately precedingthe year of change filed no later than thedate the original Form 3115 is properlyfiled under section 6.03(1) of Rev. Proc.2015–13, and include the amount of the§ 481(a) adjustment in gross income forthe taxable year immediately precedingthe year of change. In the case of a Qsubbank, the Form 3115 should indicate thatthe “filer” is the S corporation parent andthe “applicant” is the Qsub bank.

(iii) The following example illustratesthe principles of section 24.01(4)(b) ofthis revenue procedure.

Example. X, a calendar year taxpayer, is a calen-dar year bank as defined in § 581 and is not a largebank as defined in § 585(c)(2). For taxable yearsbefore 2015, X accounted for its bad debts under the§ 585 reserve method. By March 15, 2015, X prop-erly filed a Form 2553 electing to be an S corpora-tion effective January 1, 2015. Pursuant to section24.01(4)(a) of this revenue procedure, the filing ofthe Form 2553 constituted an agreement by X tochange from the § 585 reserve method to the § 166specific charge-off method for 2015 in accordancewith all of the automatic change procedures of Rev.Proc. 2015–13, and the applicable provisions of thissection 24.01. Thus, for example, X must file a Form3115 for this 2015 change in duplicate, in accor-dance with section 6.03(1) of Rev. Proc. 2015–13,by attaching the original Form 3115 to X’s timelyfiled (including any extension) original federal in-come tax return for 2015 and filing a copy of theForm 3115 with the Covington, KY, office. Theamount of X’s § 481(a) adjustment for the change isthe amount of X’s bad debt reserve as of the close ofDecember 31, 2014. X wishes to elect under§ 1361(g) to include the § 481(a) adjustment inincome in the taxable year ending December 31,2014, the taxable year immediately preceding theyear of change. To make this election, X must (1) filean original and copy of Form 3115 for the 2015change under section 6.03(1) of Rev. Proc. 2015–13,(2) file an additional copy of that Form 3115 with itsoriginal (or amended) federal income tax return for2014 filed no later than the date the original Form3115 is properly filed under section 6.03(1) of Rev.Proc. 2015–13, and (3) include the amount of its§ 481(a) adjustment in gross income in its return for2014. X must attach a statement to the original andboth copies of Form 3115 stating that X elects under§ 1361(g) to take the § 481(a) adjustment into ac-count in determining taxable income for 2014, thetaxable year immediately preceding the year ofchange.



(6) Contact information. For further in-formation regarding a change under thissection, contact K. Scott Brown at (202)317-6945, Laura Fields at (202) 317-6850or Adrienne Mikolashek at (202) 317-6850 (not a toll-free call).

SECTION 25. INSURANCECOMPANIES (§§ 816, 832, 833)

.01 Safe harbor method of accountingfor premium acquisition expenses.

(1) Description of change. Rev. Proc.2002–46, 2002–2 C.B. 105, sets forth asafe harbor method of accounting for pre-mium acquisition expenses of certain non-life insurance companies. Under thismethod, an insurance company is permit-ted to treat as premium acquisition ex-penses incurred for the taxable year anamount equal to the sum of (a) the amountof premium acquisition expenses paidduring the taxable year; (b) the differencebetween the unpaid premium acquisitionexpenses shown on the company’s annualstatement for the taxable year and the un-paid premium acquisition expenses shownon the company annual statement for thepreceding taxable year; and (c) the differ-ence between the amount of the insurancecompany’s pro forma premium acquisi-tion expenses at the end of the taxableyear and the company’s pro forma pre-mium acquisition expenses at the end ofthe preceding taxable year. The amounttaken into account as a net increase in thepro forma premium acquisition expenses,however, cannot exceed the insurancecompany’s unearned premium reserveoffset amount for that year. A special ruleapplies to premium acquisition expenseswith respect to certain contracts with in-stallment premiums. See Rev. Proc. 2002–46.

(2) Applicability. The automaticchange in this section 25.01 applies to anyinsurance company that is subject to taxunder § 831(a) and determines its premi-ums earned for insurance contracts duringthe taxable year under § 832(b)(4) in ac-cordance with the provisions of§ 1.832–4. The automatic change does notapply to an existing Blue Cross or BlueShield organization or any other organiza-tion to which § 833 applies.

May 23, 2016 Bulletin No. 2016–21970



(5) Contact information. For further in-formation regarding a change under thissection, contact Rebecca L. Baxter at(202) 317-6995 (not a toll-free call).

.02 Certain changes in method ofaccounting for organizations to which§ 833 applies

(1) Description of change. This changeapplies to an existing Blue Cross or BlueShield organization within the meaning of§ 833(c)(2), or an organization describedin § 833(c)(3), that is required to changeits method of accounting for unearnedpremiums by reason of failing to meet theMedical Loss Ratio (MLR) requirementsof § 833(c)(5), or by reason of meeting theMLR requirements of § 833(c)(5) afterfailing to meet those requirements in aprior year. See Notice 2011–4, 2011–2I.R.B. 282.


(3) Accelerated § 481(a) adjustmentperiod in certain situations. In addition tothe circumstances set forth in section7.03(4) of Rev. Proc. 2015–13, the § 481adjustment period provided in section7.03 of Rev. Proc. 2015–13 will be accel-erated in the event a taxpayer with a re-maining balance of a § 481(a) adjustmentthat arose by reason of a change in methodof accounting described in this section25.02 is required to effect another changein method of accounting described in thissection 25.02. Thus, for example, a tax-payer that fails to satisfy the requirementsof § 833(c)(5) and as a result has a posi-tive § 481(a) adjustment, is required toaccelerate the remaining balance, if any,of that adjustment in a subsequent taxableyear in which the taxpayer meets the re-quirements of § 833(c)(5).


(5) Contact information. For further in-formation regarding this section, contactRebecca L. Baxter at (202) 317-6995 (nota toll-free call).

.03 Change in qualification aslife/nonlife insurance company under§ 816(a).

(1) Description of change. This changeapplies to a taxpayer that changes its qual-ification under § 816(a) to move from alife insurance company taxable under partI of subchapter L to a non-life insurancecompany taxable under part II of subchap-ter L, or vice versa. Whether an insurancecompany is taxed under § 801 as a lifeinsurance company is determined usingthe statutory requirements of § 816(a).This section requires that a company’s lifeinsurance reserves (as defined in§ 816(b)), plus unearned premiums andunpaid losses on noncancellable life, ac-cident, and health insurance contracts notincluded in life insurance reserves, becompared to its total reserves (as definedin § 816(c)). The comparison mandated by§ 816(a) is referred to as the qualificationfraction. An insurance company is a lifeinsurance company if the sum of the lifeinsurance reserves and unearned premi-ums and unpaid losses (whether or notascertained) on noncancellable life, acci-dent, or health policies not included in lifeinsurance reserves comprise more than50% of total reserves.


(3) No audit protection or ruling onqualification as a life insurance company.The taxpayer does not receive either: (a)any audit protection under section 8.01 ofRev. Proc. 2015–13 or (b) ruling relianceunder section 10 of Rev. Proc. 2015–13 inconnection with the consent granted undersection 9 of Rev. Proc. 2015–13 for achange under this section 25.03 regardingwhether the taxpayer qualifies as a lifeinsurance company. The director will as-

certain whether the taxpayer qualifies as alife insurance company.



SECTION 26. DISCOUNTED UNPAIDLOSSES (§ 846)

.01 Composite method for discountingunpaid losses.

(1) Description of change. Section 846defines “discounted unpaid losses” forpurposes of computing the insurance com-pany taxable income of certain insurancecompanies. Notice 88–100, 1988–2 C.B.439, section V, sets forth a compositemethod for computing unpaid losses withrespect to accident years not separatelystated on the NAIC annual statement.Rev. Proc. 2002–74, 2002–2 C.B. 980,section 3.01, clarifies that the compositemethod of Notice 88–100, section V, ispermitted, but not required; section 3.02sets forth an alternative method for thosetaxpayers that do not use the compositemethod of section 3.01. An insurancecompany using a method provided in sec-tion 3.01 or 3.02 of Rev. Proc. 2002–74 tocompute discounted unpaid losses, mustuse the same method to compute dis-counted estimated salvage recoverable.An insurance company that currently usesa permissible method of accounting fordiscounted unpaid losses may change itsmethod of accounting to or from the com-posite method of Notice 88–100, sectionV, without the consent of the Commis-sioner. This change applies to insurancecompanies that are required to discountunpaid losses under § 846. See Rev. Proc.2002–74.



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SECTION 27. REAL ESTATEMORTGAGE INVESTMENTCONDUIT (REMIC) (§§ 860A–860G)

.01 REMIC inducement fees.

(1) Description of change. A taxpayerthat receives an inducement fee in connec-tion with becoming the holder of a non-economic residual interest in a REMICmust take that fee into account over theremaining expected life of the applicableREMIC in accordance with § 1.446–6.This change applies to a taxpayer thatseeks to change from any method of ac-counting for such inducement fees to oneof the safe harbor methods provided under§ 1.446–6(e)(1)–(2). See Rev. Proc.2004–30, 2004–1 C.B. 950, for additionalguidance relating to this change.

(2) Manner of making change. A tax-payer making this change must identifythe specific safe harbor method under§ 1.446–6(e) to which the taxpayer ischanging.


(4) Contact information. For further in-formation regarding a change under thissection, contact John W. Rogers, III at(202) 317-6895 (not a toll-free call).

SECTION 28. FUNCTIONALCURRENCY (§ 985)

.01 Change in functional currency.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits functional currency or the functionalcurrency of a qualified business unit(QBU) of the taxpayer. The precedingsentence does not apply to a QBU of ataxpayer described in § 1.985–1(b)(1)(iii).

(2) Manner of making change. A tax-payer making this change must make allnecessary adjustments required by suchchange. See §§ 1.985–5, 1.985–8(c). Ataxpayer must attach a statement to theForm 3115 representing that it has madethe adjustments set forth in § 1.985–5 or§ 1.985–8(c). The statement must alsoprovide the amount of any unrealized ex-change gain or loss required to be takeninto account pursuant to § 1.985–5 or§ 1.985–8(c) and the date on which a

taxpayer took such amount into account.Finally, the statement must provide a de-tailed and complete description of anyother adjustments required pursuant to§ 1.985–5 or § 1.985–8(c).


(4) Contact information. For further in-formation regarding a change under thissection, contact Peter Merkel at (202)317-4919 (not a toll-free call).

SECTION 29. ORIGINAL ISSUEDISCOUNT (§§ 1272, 1273)

.01 De minimis original issue discount(OID).

(1) Description of change. This changeapplies to a taxpayer that wants to changeto the principal-reduction method of ac-counting described in section 5 of Rev.Proc. 97–39, 1997–2 C.B. 485. Theprincipal-reduction method of accountingis an aggregate method of accounting forde minimis OID (discount) on certainloans originated by the taxpayer.


(3) Description. The principal-reduction method of accounting is a per-missible method for use by taxpayers toaccount for discount on one or more cat-egories of loans described in section 4.02or 4.03 of Rev. Proc. 97–39. If theprincipal-reduction method is used to ac-count for any loans in a category of loans,the method must be used for the entirecategory of loans. The principal-reductionmethod applies only to loans described insection 3 of Rev. Proc. 97–39.

(4) Manner of making change.(a) This change is made on a cut-off

basis and applies only to loans describedin section 3 of Rev. Proc. 97–39 that wereacquired on or after the beginning of theyear of change. Accordingly, a § 481(a)adjustment is neither permitted nor re-quired.

(b) The taxpayer must maintain booksand records sufficient to satisfy the direc-tor that old and new loans have been ad-equately segregated.

(5) Additional requirements. On astatement attached to the Form 3115, thetaxpayer must:

(a) identify the categories of loans towhich the proposed method will apply;and

(b) describe any “additional catego-ries” permitted under section 4.03 of Rev.Proc. 97–39.




.02 Proportional method of accountingfor OID on a pool of credit card receiv-ables.

(1) Description of change. This changeapplies to a taxpayer that wants to changeto the proportional method of accountingfor OID on a pool of credit card receiv-ables as described in Rev. Proc. 2013–26,2013–22 I.R.B. 1160.

(2) Manner of making change. Thischange is made on a cut-off basis. Accord-ingly, a § 481(a) adjustment is neitherrequired nor permitted. The unaccruedOID for the pool as of the beginning of thefirst period in the year of change is equalto the unaccrued OID for the pool as ofthe end of the preceding year under thetaxpayer’s previous method of accountingfor the pool.


(4) Contact information. For further in-formation regarding this section, pleasecontact Charles W. Culmer at (202) 317-6945 (not a toll-free call).

May 23, 2016 Bulletin No. 2016–21972

SECTION 30. MARKET DISCOUNTBONDS (§ 1278)

.01 Revocation of § 1278(b) election.

(1) Description of change. This changeapplies to a taxpayer that wants to changeits method of accounting for market dis-count bonds by revoking its § 1278(b)election. Under § 1278(b), a taxpayer mayelect a method of accounting under whichmarket discount is currently included ingross income for the taxable years towhich the discount is attributable. SeeRev. Proc. 92–67, 1992–2 C.B. 429, forthe procedures to make a § 1278(b) elec-tion (including a deemed § 1278(b) elec-tion). The procedures for revoking a§ 1278 election were formerly provided insection 7 of Rev. Proc. 92–67.

(2) Revocation of election. The revoca-tion of a § 1278(b) election applies to allmarket discount bonds that are held by thetaxpayer on the first day of the first tax-able year for which the revocation is ef-fective (year of change), and to all marketdiscount bonds that are subsequently ac-quired by the taxpayer. If a § 1278(b)election is revoked, then for purposes of§ 1278(a), accrued market discount withrespect to any bond previously subject tothe election means accrued market dis-count as defined in § 1276(b) less anymarket discount included in income whilethe bond was subject to the § 1278(b)election.

(3) Manner of making change. Thischange is made on a cut-off basis andapplies only to market discount accruingon or after the beginning of the year ofchange. Accordingly, a § 481(a) adjust-ment is neither permitted nor required.Market discount accruing on a bond priorto the year of change was currently in-cluded in income and market discount ac-cruing on the bond on and after the firstday of the year of change is included inincome generally upon disposition of thebond. See § 1276(a). Because a cut-offbasis is prescribed for this change, thebasis of any bond, adjusted for amountspreviously included in income during theperiod of the election, is not affected bythe revocation.

(4) Additional requirements. On astatement attached to the Form 3115, thetaxpayer must provide:

(a) the reason(s) for revoking the§ 1278(b) election (or deemed § 1278(b)election);

(b) a description of the method bywhich, and the date on which, the tax-payer made the § 1278(b) election (ordeemed § 1278(b) election) that is beingrevoked; and

(c) a statement that, after the revoca-tion, the taxpayer will not make a constantinterest rate election for any bond that hasbeen subject to the § 1278(b) election (ordeemed § 1278(b) election) being revokedand for which a constant interest rate elec-tion was not effective in the year of ac-quisition.

(5) Audit protection. A taxpayer mayreceive audit protection, as provided insection 8.01 of Rev. Proc. 2015–13,2015–5 I.R.B. 419, in connection with thischange. Any audit protection applicable tothis change under section 8.01 of Rev.Proc. 2015–13 does not preclude theCommissioner from examining themethod used by the taxpayer to determinethe amount of accrued market discountunder § 1276(b) for a taxable year prior tothe year of change.



SECTION 31. SHORT-TERMOBLIGATIONS (§ 1281)

.01 Interest income on short obligations.


that wants to change its method of ac-counting to comply with § 1281 for inter-est income on short-term obligations.

(b) Under § 1281, a holder of certainshort-term obligations, including a bankas defined in § 581, must include in grossincome any accrued interest income onsuch obligations, regardless of the hold-er’s overall method of accounting. Section1281 applies to all types of interest in-come, including acquisition discount,original issue discount (OID), and statedinterest. See S. Rep. No. 99–313, 99th

Cong., 2d Sess. 903 (1986), 1986–3 (Vol.3) C.B. 903.

(c) Section 1283(a)(1) generally de-fines a short-term obligation as any bond,debenture, note, certificate, or other evi-dence of indebtedness that matures in oneyear or less from its issue date.

(d) Under §§ 1281(a) and 1283(c), aholder of a short-term obligation subjectto § 1281 must include in gross income anamount equal to the sum of the daily por-tions of the acquisition discount or OID,whichever is applicable, on the obligationfor each day during the taxable year thatthe obligation is held by the holder. See§ 1283(b), as modified by § 1283(c), todetermine the daily portions of acquisitiondiscount or OID. In addition, § 1281(a)requires the holder to include in grossincome any stated interest that is payableon the short-term obligation (other thanstated interest taken into account to deter-mine the amount of the acquisition dis-count or OID) as it accrues.

(2) Section 481(a) adjustment period.A taxpayer must take the entire § 481(a)adjustment into account in computing tax-able income for the year of change.



.02 Stated interest on short-term loansof cash method banks.

(1) Description of change. This changeapplies to a bank that uses the cash re-ceipts and disbursements (cash) method ofaccounting as its overall accountingmethod and that wants to change itsmethod of accounting from accruingstated interest on short-term loans made inthe ordinary course of business to usingthe cash method for that interest. For ex-ample, see Security State Bank v. Com-missioner, 214 F.3d 1254 (10th Cir. 2000),aff’g 111 T.C. 210 (1998), acq., 2001–1C.B. xix; and Security Bank Minnesota v.Commissioner, 994 F.2d 432 (8th Cir.1993), aff’g 98 T.C. 33 (1992), in whichthe courts held that § 1281 does not applyto short-term loans made by a cash

Bulletin No. 2016–21 May 23, 2016973

method bank in the ordinary course of itsbusiness.


(3) Section 481(a) adjustment period.A taxpayer making this change must takethe entire § 481(a) adjustment into ac-count in computing taxable income for theyear of change.



EFFECTIVE DATE

.01 In general. Except as otherwiseprovided under this EFFECTIVE DATEsection, this revenue procedure is effec-tive for a Form 3115 filed on or after May5, 2016, for a year of change ending on orafter September 30, 2015, that is filedunder the automatic change procedures ofRev. Proc. 2015–13, 2015–5 I.R.B. 419,as clarified and modified by Rev. Proc.2015–33, 2015–24 I.R.B. 1067, and asmodified by Rev. Proc. 2016–1, 2016–1I.R.B. 1.

.02 Transition rules. The followingtransition rules apply:

(1) Limited time period to convert aForm 3115 filed under the non-automaticchange procedures in Rev. Proc. 2015–13. If before May 5, 2016, a taxpayerproperly filed a Form 3115 under the non-automatic change procedures in Rev.Proc. 2015–13 requesting the Commis-sioner’s consent for a change in method ofaccounting described in this revenue pro-cedure, and the Form 3115 is pendingwith the national office on May 5, 2016,the taxpayer may choose to make thechange in method of accounting under theautomatic change procedures in Rev.Proc. 2015–13 if the taxpayer is otherwiseeligible to use this revenue procedure andthe automatic change procedures in Rev.Proc. 2015–13. The taxpayer must notifythe national office contact person (if un-known, see section 9.08(6) of Rev. Proc.2016–1, 2016–1 I.R.B. 1, 48 (or succes-

sor)) for the Form 3115 of the taxpayer’sintent to make the change in method ofaccounting under the automatic changeprocedures in Rev. Proc. 2015–13 beforethe later of (a) June 6, 2016, or (b) theissuance of a letter ruling granting or de-nying consent for the change. The notifi-cation should indicate that the taxpayerchooses to convert the Form 3115 to theautomatic change procedures in Rev.Proc. 2015–13. If the taxpayer timely no-tifies the national office that it chooses toconvert the Form 3115 to the automaticchange procedures in Rev. Proc. 2015–13,the national office will send a letter to thetaxpayer acknowledging its request andwill return the user fee submitted with theForm 3115.

A taxpayer converting a Form 3115 tothe automatic change procedures in Rev.Proc. 2015–13 for a change in method ofaccounting described in this revenue pro-cedure must resubmit a Form 3115 thatconforms to the automatic change proce-dures, with a copy of the national officeletter sent acknowledging the taxpayer’srequest attached, to the IRS in Covington,KY by the earlier of (a) the 30th calendarday after the date of the national office’sletter acknowledging the taxpayer’s re-quest, or (b) the date the taxpayer is re-quired to file the Duplicate copy of theForm 3115 under SECTION6.03(1)(a)(i)(B) of Rev. Proc. 2015–13.See SECTION 6.03(3) of Rev. Proc.2015–13 regarding additional requiredcopies of Form 3115.

For purposes of the eligibility rules inSECTION 5 of Rev. Proc. 2015–13, theDuplicate copy of the timely resubmittedForm 3115 will be considered filed as ofthe date the taxpayer originally filed theconverted Form 3115 under the non-automatic change procedures in Rev.Proc. 2015–13. This paragraph (1) doesnot extend the date the taxpayer must filethe original (converted) Form 3115 underSECTION 6.03(1)(a)(i)(A) of Rev. Proc.2015–13.

A Form 3115 filed under the non-automatic change procedures in Rev.Proc. 2015–13 before May 5, 2016, for achange in method of accounting describedin this revenue procedure, will be disre-garded for purposes of the prior five yearchange rules in SECTIONS 5.04 and 5.05of Rev. Proc. 2015–13 if the taxpayer

converts the Form 3115 pursuant to thisparagraph (1).

(2) Forms 3115 for changes in methodsof accounting that can no longer be filedunder the automatic change procedures.The following transition rules apply to thechanges in methods of accounting that canno longer be filed under the automaticchange procedures in Rev. Proc. 2015–13.Such changes are described in subsection.01(1), (4), and (7) of the SIGNIFICANTCHANGES section of this revenue proce-dure.

(a) For changes described in subsection.01(1) and (4) of the SIGNIFICANTCHANGES section of this revenue proce-dure:

(i) If before May 5, 2016, a taxpayerproperly filed the original, or the Dupli-cate copy, of a Form 3115 under the au-tomatic change procedures in Rev. Proc.2015–13 for a change in method of ac-counting described in subsection .01(1) or(4) of the SIGNIFICANT CHANGESsection of this revenue procedure, the tax-payer may make that change under theautomatic change procedures in Rev.Proc. 2015–13 for the year of change.

(ii) If before May 5, 2016, a taxpayerdid not properly file the original, or theDuplicate copy, of a Form 3115 under theautomatic change procedures in Rev.Proc. 2015–13 for a change in method ofaccounting described in subsection .01(1)or (4) of the SIGNIFICANT CHANGESsection of this revenue procedure, the tax-payer must make that change under thenon-automatic change procedures in Rev.Proc. 2015–13. Notwithstanding § 1.446–1(e)(3)(i), the taxpayer may file a Form3115 to request the Commissioner’s con-sent to change the method of accountingunder the non-automatic change proce-dures in Rev. Proc. 2015–13 for the tax-payer’s last taxable year ending beforeMay 5, 2016, on or before the due date ofthe federal income tax return for that tax-able year. Solely for purposes of this para-graph (2)(a)(ii), the due date of the tax-payer’s federal income tax return includesextensions, notwithstanding that the tax-payer may not have extended the due date.

(b) For the change described in subsec-tion .01(7) of the SIGNIFICANTCHANGES section of this revenue proce-dure:

May 23, 2016 Bulletin No. 2016–21974

(i) If before June 6, 2016, a taxpayerproperly filed the original, or the Dupli-cate copy, of a Form 3115 under the au-tomatic change procedures in Rev. Proc.2015–13 for a change in method of ac-counting described in subsection .01(7) ofthe SIGNIFICANT CHANGES section ofthis revenue procedure, the taxpayer maymake that change under the automaticchange procedures in Rev. Proc. 2015–13for the year of change.

(ii) If before June 6, 2016, a taxpayerdid not properly file the original, or theDuplicate copy, of a Form 3115 under theautomatic change procedures in Rev.Proc. 2015–13 for a change in method ofaccounting described in subsection .01(7)of the SIGNIFICANT CHANGES sectionof this revenue procedure, the taxpayermust make that change under the non-automatic change procedures in Rev.Proc. 2015–13. Notwithstanding § 1.446–1(e)(3)(i), the taxpayer may file a Form3115 to request the Commissioner’s con-sent to change the method of accountingunder the non-automatic change proce-dures in Rev. Proc. 2015–13 for the tax-payer’s last taxable year ending beforeJune 6, 2016, on or before the due date ofthe federal income tax return for that tax-able year. Solely for purposes of this para-graph (2)(b)(ii), the due date of the tax-payer’s federal income tax return includesextensions, notwithstanding that the tax-payer may not have extended the due date.

EFFECT ON OTHER DOCUMENTS

.01 This revenue procedure amplifiesand modifies Rev. Proc. 2015–14, 2015–5I.R.B. 450, as modified by Rev. Proc.2015–20, 2015–9 I.R.B. 694. Rev. Proc.2015–14, as amplified and modified is su-perseded in part. The third sentence in thesubsection .01 under the EFFECT ONOTHER DOCUMENTS section of Rev.Proc. 2015–14 remains in effect. All othersections of Rev. Proc. 2015–14 are super-seded.

.02 Rev. Proc. 2011–46, 2011–42I.R.B. 518, is modified as follows:

(1) Section 5.02(3)(a) is modified toremove the first two sentences in the Man-ner of Making Change section and to sub-stitute the following three new sentencesin its place:

(a) In accordance with § 1.446–1(e)(3)(ii), the requirement under

§ 1.446–1(e)(3)(i) to file a Form 3115 iswaived and a statement in lieu of a Form3115 is authorized for this change. Not-withstanding the definition of Form 3115in section 3.07 of Rev. Proc. 2015–13,2015–5 I.R.B. 419, the statement in lieu ofa Form 3115 that is permitted under thisparagraph 5.02(3)(a) is considered a Form3115 for purposes of the automatic con-sent procedures in Rev. Proc. 2015–13.However, the requirement to file the Du-plicate copy, under section 6.03(1)(a) ofRev. Proc. 2015–13, is waived.

(2) Section 5.03(2)(a) is modified toremove the first two sentences in the Man-ner of Making Change section and to sub-stitute the following three new sentencesin its place:

(a) In accordance with § 1.446–1(e)(3)(ii), the requirement under§ 1.446–1(e)(3)(i) to file a Form 3115 iswaived and a statement in lieu of a Form3115 is authorized for this change. Not-withstanding the definition of Form 3115in section 3.07 of Rev. Proc. 2015–13, thestatement in lieu of a Form 3115 that ispermitted under this paragraph 5.03(2)(a)is considered a Form 3115 for purposes ofthe automatic consent procedures in Rev.Proc. 2015–13. However, the requirementto file the Duplicate copy, under section6.03(1)(a) of Rev. Proc. 2015–13, iswaived.

.03 Rev. Rul. 2004–62, 2004–1 C.B.1072, is modified to remove the secondsentence in the CHANGE IN METHODOF ACCOUNTING section and to substi-tute the following new two sentences in itsplace:

A taxpayer that wants to change itsmethod of accounting to comply with thisrevenue ruling must follow the automaticchange procedures in Rev. Proc. 2015–13,2015–5 I.R.B. 419, (or successor) if thetaxpayer is eligible to request such con-sent under the automatic change proce-dures therein. The eligibility rules in sec-tion 5.01(1) of Rev. Proc. 2015–13 (orsuccessor) apply to a change in method ofaccounting described in section 3.04 ofRev. Proc. 2016–29, 2016–21 I.R.B. 880(or successor).

.04 Rev. Rul. 2000–7, 2000–9 C.B.712, is modified to remove the fourth sen-tence of the paragraph in the APPLICA-TION section and to substitute the follow-ing new fourth sentence:

A taxpayer that wants to change itsmethod of accounting to conform with theholding in this revenue ruling must followthe automatic change procedures in Rev.Proc. 2015–13, 2015–5 I.R.B. 419, (orsuccessor) if the taxpayer is eligible torequest such consent under the automaticchange procedures therein, except that theeligibility rule in section 5.01(1)(f) ofRev. Proc. 2015–13 (or successor) doesnot apply to a change described in section11.03 of Rev. Proc. 2016–29, 2016–21I.R.B. 880 (or successor).

.05 Rev. Rul. 2000–4, 2000–1 C.B.331, is modified to remove the secondsentence of the paragraph in the APPLI-CATION section, and to substitute thefollowing two new sentences in that para-graph in its place:

A taxpayer that wants to change itsmethod of accounting to conform with theholding in this revenue ruling must followthe automatic change procedures in Rev.Proc. 2015–13, 2015–5 I.R.B. 419, (orsuccessor) if the taxpayer is eligible torequest such consent under the automaticchange procedures therein. The eligibilityrules in section 5.01(1) of Rev. Proc.2015–13 (or successor) apply to a changein method of accounting under section3.02 of Rev. Proc. 2016–29, 2016–21I.R.B. 880 (or successor).

.06 Rev. Proc. 2007–48, 2007–2 C.B.110, is modified to remove section 5.06(1)and to substitute it with the following sen-tence:

The eligibility rule in section 5.01(1)(f)of Rev. Proc. 2015–13, 2015–5 I.R.B.419, (or successor) does not apply to achange in method of accounting describedin section 5.06 of Rev. Proc. 2007–48,and made under section 21.09 of Rev.Proc. 2016–29, 2016–21 I.R.B. 880 (orsuccessor).

PAPERWORK REDUCTION ACT

The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. 3507) under control number 1545-1551. An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid OMB control number.

Bulletin No. 2016–21 May 23, 2016975

The collections of information in thisrevenue procedure are in sections 3, 5, 6,7, 8, 9, 11, 12, 15, 16, 17, 18, 19, 20, 21,22, 23, 24, 28, 29, and 30. This informa-tion is necessary and will be used to de-termine whether the taxpayer properlychanged to a permitted method of ac-counting. The collections of informationare required for the taxpayer to obtainconsent to change its method of account-ing. The likely respondents are the follow-ing: individuals, farms, business or otherfor-profit institutions, nonprofit institu-tions, and small businesses or organiza-tions.

The estimated total annual reportingand/or recordkeeping burden is 30,580hours.

The estimated annual burden per re-spondent/recordkeeper varies from 1/6hour to 8 ½ hours, depending on individ-ual circumstances, with an estimated av-erage of 1 ¼ hours. The estimated numberof respondents is 27,336. The estimatedannual frequency of responses is on occa-sion.

SIGNIFICANT CHANGES

.01 Significant changes to the List ofAutomatic Changes in Rev. Proc.2015–14 include:

(1) Section 6.01, relating to impermis-sible to permissible methods of deprecia-tion or amortization, is amplified andmodified to provide that a taxpayer cannot make a change under this section forany property for which the taxpayer hasclaimed a federal income tax credit. Thischange in method of accounting must bemade under the non-automatic changeprocedures in Rev. Proc. 2015–13. Previ-ously, section 6.01 did not apply to prop-erty for which the taxpayer claimed therehabilitation credit under § 47 and is re-classifying under § 168(e);

(2) Section 6.10, relating to late partialdisposition elections under § 168, and sec-tion 6.12, relating to partial dispositions oftangible depreciable assets to which theIRS’s adjustment pertains, are modified toremove all references to Prop. Reg.§ 1.168(i)–8 because it is obsolete;

(3) Section 6.20, relating to the revo-cation of a partial disposition election un-der the remodel-refresh safe harbor de-scribed in Rev. Proc. 2015–56, 2015–49I.R.B. 827, is modified to provide that

such revocation must be made, and theeligibility rules in sections 5.01(1)(d) and(f) of Rev. Proc. 2015–13 do not apply,for any taxable year beginning after De-cember 31, 2013, and ending before De-cember 31, 2016. Previously, this revoca-tion of the partial disposition election hadto be made, and these eligibility rules didnot apply for a change, under section 6.20for the first or second taxable year begin-ning after December 31, 2013;

(4) Section 11.08, relating to changesfor tangible property, is modified to pro-vide that this section does not apply toamounts paid or incurred for repair andmaintenance costs that the taxpayer ischanging from capitalizing to deductingand for which the taxpayer has claimed afederal income tax credit or elected toapply § 168(k)(4). This change in methodof accounting must be made under thenon-automatic change procedures in Rev.Proc. 2015–13;

(5) Section 11.10, relating to theremodel-refresh safe harbor described inRev. Proc. 2015–56, is modified to pro-vide that the eligibility rules in sections5.01(1)(d) and (f) of Rev. Proc. 2015–13do not apply for any taxable year begin-ning after December 31, 2013, and endingbefore December 31, 2016. Previously,these eligibility rules did not apply for achange under section 11.10 for the first orsecond taxable year beginning after De-cember 31, 2013;

(6) Section 13.01, relating to changesto comply with the requirements of § 267,is modified to provide that the eligibilityrules in sections 5.01(1)(e) and (f) of Rev.Proc. 2015–13 do not apply to changes tocomply with § 267(a)(3);

(7) Section 18.01 of Rev. Proc. 2015–14, relating to changes for long-term con-tracts to the percentage-of-completionmethod described in § 1.460–4(b), is re-moved from the revenue procedure in itsentirety. This change in method of ac-counting must be made under the non-automatic change procedures in Rev.Proc. 2015–13;

(8) Section 21.05, relating to imper-missible methods of identification andvaluation of inventory, is amplified andmodified to provide that a taxpayer canmake a change under this section if thetaxpayer is changing from an impermissi-ble method of accounting under § 471.

This change was previously limited to ataxpayer changing from an impermissiblemethod of accounting described in§§ 1.471–2(f)(1) through (5);

(9) The following sections are added tothe List of Automatic Changes in this rev-enue procedure to provide additionalchanges in method of accounting to bemade under the automatic change proce-dures:(a) Section 10.01, relating to changes forstart-up expenditures under § 195;(b) Section 12.14, relating to changes forinterest capitalization under § 263A; and(c) Section 21.17, relating to certainchanges within the retail inventorymethod under § 471;

(10) The waiver of the eligibility rulein section 5.01(1)(f) of Rev. Proc.2015–13 is extended one year to any tax-able year beginning before January 1,2016, for the following sections:

(a) Section 6.13, relating to deprecia-tion of leasehold improvements under§ 1.167(a)–4;

(b) Section 6.14, relating to a changefrom a permissible to another permissiblemethod of accounting for depreciation ofMACRS property under §§ 1.168(i)–1,1.168(i)–7, and 1.168(i)–8;

(c) Section 6.15, relating to disposi-tions of a building or structural compo-nent under § 1.168(i)–8;

(d) Section 6.16, relating to disposi-tions of tangible depreciable assets (otherthan a building or its structural compo-nents) under § 1.168(i)–8;

(e) Section 6.17, relating to disposi-tions of tangible depreciable assets in ageneral asset account under § 1.168(i)–1;and

(f) Section 11.08, relating to changesfor tangible property under the final tan-gible property regulations; and

(11) The following sections of Rev.Proc. 2015–14 are obsolete and are re-moved from the revenue procedure intheir entirety:

(a) Section 6.08, relating to deprecia-tion of cable TV fiber optics under thesafe harbor method of accounting pro-vided in Rev. Proc. 2003–63, 2003–2C.B. 304;

(b) Section 6.27, relating to deprecia-tion of leasehold improvements under§ 1.167(a)–4T;

May 23, 2016 Bulletin No. 2016–21976

(c) Section 6.28, relating to a changefrom a permissible to another permissiblemethod of accounting for depreciation ofMACRS property under §§ 1.168(i)–1T,1.168(i)–7T, and 1.168(i)–8T, and Prop.Reg. §§ 1.168(i)–1, 1.168(i)–7, and1.168(i)–8;

(d) Section 6.29, relating to disposi-tions of a building or structural compo-nent under § 1.168(i)–8T and Prop. Reg.§ 1.168(i)–8;

(e) Section 6.30, relating to disposi-tions of tangible depreciable assets (otherthan a building or its structural compo-nents) under § 1.168(i)–8T and Prop.Reg. § 1.168(i)–8;

(f) Section 6.31, relating to disposi-tions of tangible depreciable assets in a

general asset account under § 1.168(i)–1Tand Prop. Reg. § 1.168(i)–1;

(g) Section 6.32, relating to generalasset account elections under§ 1.168(i)–1, § 1.168(i)–1T, and Prop.Reg. § 1.168(i)–1; and

(h) Section 10.11(3)(b), relating tochanges for tangible property under thetemporary tangible property regulations.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Charles Magee of the Officeof Associate Chief Counsel (Income Taxand Accounting). For further informationregarding this revenue procedure, contactMr. Magee at (202) 317-7005 (not a toll-free number).

For further information regarding aspecific change in method of accountingin this revenue procedure, contact the in-dividual listed in the “Contact Person(s)”section located at the end of each sectionof the revenue procedure (calls are nottoll-free) or see the CONTACT LIST atthe end of this revenue procedure. Thecontact person is with one of the follow-ing Offices of Associate Chief Counsel:Corporate (CORP), Financial Institutionsand Products (FI&P), Income Tax & Ac-counting (IT&A), International (INTL),Passthroughs and Special Industries(P&SI), or Tax Exempt and GovernmentEntities (TEGE).

LIST OF AUTOMATIC CHANGES CONTACT LIST

Section NumberDesignated Automatic

Accounting Change Number Contact Name Telephone Number Office

1.01 91 William E. Blanchard (202) 317-3900 FI&P

2.01 1 William Ruane (202) 317-4718 IT&A

3.01 2 Peter Ford (202) 317-7011 IT&A

3.02 3 Peter Ford (202) 317-7011 IT&A

3.03 4 Peter Ford (202) 317-7011 IT&A

3.04 86 Peter Ford (202) 317-7011 IT&A

3.05 See § 11.08 See § 11.08 See § 11.08 IT&A

3.06 See § 11.08 See § 11.08 See § 11.08 IT&A

3.07 158 Lewis Saideman (202) 317-5100 IT&A




3.11 208, 209 Merrill Feldstein (202) 317-5100 IT&A

4.01 5 Charles Gorham (202) 317-7003 IT&A

4.02 211 K. Scott Brown (202) 317-6945 FI&P


5.02 212 Joseph Vetting (202) 317-4960 INTL

6.01 7 Charles Magee (202) 317-7005 IT&A


6.03 10 Edward Schwartz (202) 317-7006 IT&A

6.04 87 Elizabeth Binder (202) 317-7005 IT&A


6.06 89 Bernard Harvey (202) 317-7005 IT&A




6.10 196 Patrick Clinton (202) 317-7005 IT&A


Bulletin No. 2016–21 May 23, 2016977









6.18 Summary of changesrelatedto dispositions ofMACRS property




8.01 152 Jennifer Bernardini (202) 317-6853 P&SI



11.01 19 Jason Kristall (202) 317-7003 IT&A







11.08 184–193 Lewis Saideman (202) 317-5100 IT&A

11.09 213 Charles Gorham (202) 317-7003 IT&A

11.10 222 Merrill Feldstein (202) 317-5100 IT&A

12.01 22 Natasha Mulleneaux (202) 317-7007 IT&A



12.04 77 Sean Dwyer (202) 317-7005 IT&A

12.05 92 Sean Dwyer (202) 317-7005 IT&A

12.06 150, 151 Natasha Mulleneaux (202) 317-7007 IT&A



12.09 195 Sue-Jean Kim (202) 317-7007 IT&A

12.10 201 Sean Dwyer (202) 317-7005 IT&A

12.11 202 Sean Dwyer (202) 317-7005 IT&A

12.12 214 Sean Dwyer (202) 317-7005 IT&A

12.13 215 Sean Dwyer (202) 317-7005 IT&A

12.14 224 Steven Gee (202) 317-7007 IT&A

13.01 26 Steven Gee (202) 317-7007 IT&A

Joseph Vetting (202) 317-4960 INTL

14.01 28 Maryellen Furr (202) 317-5600 TEGE

14.02 29 David Zeigler (202) 317-8629 EP

Carlton Watkins (202) 317-8631 EP

15.01 122, 123 Cheryl Oseekey (202) 317-7007 IT&A

15.02 31 Timothy Azarchs (202) 317-5100 IT&A

May 23, 2016 Bulletin No. 2016–21978



15.03 32,33 Megan Kirmil (202) 317-7007 IT&A

15.04 34, 35 Sean Dwyer (202) 317-7005 IT&A


15.06 85 Bernard Harvey (202) 317-7005 IT&A

15.07 90 Rebecca L. Baxter (202) 317-6995 FI&P

15.08 108 K. Scott Brown (202) 317-6945 FI&P

15.09 124 Douglas Kim (202) 317-7003 IT&A

15.10 125 Timothy Azarchs (202) 317-5100 IT&A

15.11 126 Megan Kirmil (202) 317-7007 IT&A

15.12 127 K. Scott Brown (202) 317-6945 FI&P

15.13 128 Maxine Woo-Garcia (202) 317-7011 IT&A

Christina Glendening (202) 317-7003 IT&A

15.14 129 David H. McDonnell (202) 317-4137 P&SI

15.15 148 Charles W. Culmer (202) 317-6945 FI&P

16.01 36 K. Scott Brown (202) 317-6945 FI&P

16.02 37 Daniel Cassano (202) 317-7011 IT&A

16.03 38 Sandra Cheston (202) 317-7011 IT&A

16.04 39 Bill Ruane (202) 317-4718 IT&A

16.05 80, 81 Kate Sleeth (202) 317-7053 FI&P

16.06 82 Kate Sleeth (202) 317-7053 FI&P

16.07 83, 84, 216 Peter Ford (202) 317-7011 IT&A

16.08 94 Kate Sleeth (202) 317-7053 FI&P

16.09 130, 217 Peter Cohn (202) 317-7011 IT&A

16.10 153 Ronald Goldstein (202) 317-7003 IT&A



19.01 42, 133, 134 Sandra Cheston (202) 317-7011 IT&A

19.02 43 Kari Fisher (202) 317-5100 IT&A

19.03 44 Kari Fisher (202) 317-5100 IT&A

19.04 45, 113 Mon Lam (202) 317-5100 IT&A

19.05 46 Mon Lam (202) 317-5100 IT&A

19.06 106 Christina M. Glen-dening

(202) 317-7003 IT&A

19.07 135 Mon Lam (202) 317-5100 IT&A

19.08 149 Daniel Cassano (202) 317-7011 IT&A


(202) 317-7003 IT&A


(202) 317-7003 IT&A


(202) 317-7011 IT&A

19.12 220 David Christensen (202) 317-7011 IT&A

20.01 136 William Ruane (202) 317-4718 IT&A

21.01 48 Steven Gee (202) 317-7007 IT&A

21.02 49 Steven Gee (202) 317-7007 IT&A

21.03 50, 51 Natasha Mulleneaux (202) 317-7007 IT&A

21.04 53 Steven Gee (202) 317-7007 IT&A

Bulletin No. 2016–21 May 23, 2016979




21.06 55 Andrew Braden (202) 317-7007 IT&A




21.10 111 Steven Gee (202) 317-7007 IT&A

21.11 137 Steven Gee (202) 317-7007 IT&A



21.14 114 Leo Nolan (202) 317-7007 IT&A

21.15 203 Sean Dwyer (202) 317-7005 IT&A

21.16 204 Natasha M. Mulle-neaux

(202) 317-7007 IT&A

21.17 225 Natasha M. Mulle-neaux

(202) 317-7007 IT&A

22.01 56 Leo Nolan (202) 317-7007 IT&A

22.02 57 Leo Nolan (202) 317-7007 IT&A

22.03 58 Leo Nolan (202) 317-7007 IT&A

22.04 59 Leo Nolan (202) 317-7007 IT&A

22.05 60 Leo Nolan (202) 317-7007 IT&A

22.06 61 Leo Nolan (202) 317-7007 IT&A

22.07 62 Leo Nolan (202) 317-7007 IT&A

22.08 112 Leo Nolan (202) 317-7007 IT&A

22.09 140 Leo Nolan (202) 317-7007 IT&A

22.10 141 Leo Nolan (202) 317-7007 IT&A

23.01 64 Eric E. Boody (202) 317-6945 FI&P

23.02 218 Eric E. Boody (202) 317-6945 FI&P

24.01 66 K. Scott Brown (202) 317-6945 FI&P

Laura Fields (202) 317-6850 P&SI

Adrienne Mikolashek (202) 317-6850 P&SI





27.01 79 John W. Rogers, III (202) 317-6895 FI&P

28.01 70 Peter Merkel (202) 317-4919 INTL


29.02 183 Charles W. Culmer (202) 317-6945 FI&P




May 23, 2016 Bulletin No. 2016–21980

26 CFR 601.202: Closing agreements (Also Part I, §§ 446, 482, 7121; 1.446–1, 301.7121–1)

Rev. Proc. 2016–30

SECTION 1. PURPOSE.............................................................................................................................................................................................982

SECTION 2. BACKGROUND ..................................................................................................................................................................................982

SECTION 3. SCOPE...................................................................................................................................................................................................982

.01 Eligible taxpayers ....................................................................................................................................................................982

.02 Eligible taxable years ..............................................................................................................................................................982

.03 Eligible issues generally..........................................................................................................................................................982

.04 Relationship of eligible issues to eligible taxable years ........................................................................................................983

.05 Eligible domestic and eligible international issues requiring coordination and consultation with Associate Chief Counsel.983

.06 Eligible international issues requiring Associate Chief Counsel (International) concurrence in execution.......................983

.07 Special provisions for requests on international issues.........................................................................................................983

.08 Excluded domestic and international issues...........................................................................................................................983

.09 Methods of accounting ............................................................................................................................................................984

.10 Definition of taxpayer..............................................................................................................................................................984

SECTION 4. REQUESTING A PRE-FILING AGREEMENT.................................................................................................................................984

.01 Required information...............................................................................................................................................................984

.02 Specific descriptions of issues .................................................................................................................................................984

.03 Perjury statement.....................................................................................................................................................................985

.04 Agreement regarding examination or inspection of records .................................................................................................985

.05 Signature ..................................................................................................................................................................................985

.06 Where to submit request..........................................................................................................................................................985

SECTION 5. SELECTING TAXPAYERS FOR THE PFA PROGRAM ................................................................................................................985

.01 Jurisdiction of LB&I Practice Area Director and coordination and consultation with the Associate Chief Counsel .......985

.02 Criteria for selection ...............................................................................................................................................................985

.03 Notification...............................................................................................................................................................................986

.04 Requests not accepted .............................................................................................................................................................986

SECTION 6. PROCESSING A REQUEST FOR A PFA.........................................................................................................................................986

.01 Planning ...................................................................................................................................................................................986

.02 Continuing coordination..........................................................................................................................................................986

.03 Drafting....................................................................................................................................................................................986

.04 Return filing requirements.......................................................................................................................................................986

.05 TEFRA taxpayers.....................................................................................................................................................................986

.06 Execution prior to filing ..........................................................................................................................................................986

.07 Execution after filing ...............................................................................................................................................................986

SECTION 7. NATURE AND EFFECT OF A PFA..................................................................................................................................................986

.01 Criteria for issuance................................................................................................................................................................986

.02 Form and content ....................................................................................................................................................................986

.03 Methods and periods of accounting........................................................................................................................................987

SECTION 8. WITHDRAWAL...................................................................................................................................................................................987

SECTION 9. NO PFA EXECUTED ..........................................................................................................................................................................987

.01 Post-filing procedures..............................................................................................................................................................987

.02 Administrative appeals ............................................................................................................................................................987

SECTION 10. USER FEE ..........................................................................................................................................................................................987

.01 Taxpayers subject to fees ........................................................................................................................................................987

.02 Amount of fee...........................................................................................................................................................................987

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.03 Time and method of payment ..................................................................................................................................................987

.04 Withdrawal...............................................................................................................................................................................987

SECTION 11. DISCLOSURE ....................................................................................................................................................................................987

SECTION 12. EFFECTIVE DATE AND DURATION OF PROCEDURE ............................................................................................................988

SECTION 13. EFFECT ON OTHER DOCUMENTS...............................................................................................................................................988

SECTION 14. RECORD-KEEPING REQUIREMENTS ..........................................................................................................................................988

SECTION 15. PAPERWORK REDUCTION ACT...................................................................................................................................................988

SECTION 16. DRAFTING INFORMATION ...........................................................................................................................................................988

SECTION 1. PURPOSE

.01 This revenue procedure permits ataxpayer under the jurisdiction of theLarge Business and International Division(LB&I) to request that the Service exam-ine specific issues relating to tax returnsbefore those returns are filed. This reve-nue procedure modifies and supersedesRev. Proc. 2009–14, 2009–3 I.R.B. 324.This revenue procedure provides theframework within which a taxpayer andthe Service may work together in a coop-erative environment to resolve, after ex-amination, issues accepted into the pro-gram. If the taxpayer and the Service areable to resolve the examined issues beforethe tax returns that they affect are filed,this revenue procedure authorizes the tax-payer and the Service to memorialize theiragreement by executing an LB&I Pre-Filing Agreement (PFA).

.02 This revenue procedure outlines theprocedures for resolving issues through pre-filing examinations. Taxpayers and the Ser-vice often resolve issues more effectivelyand efficiently through a pre-filing exami-nation than a post-filing examination, be-cause the taxpayer and the Service havemore timely access to the records and per-sonnel that are relevant to the issues. Apre-filing examination also provides the tax-payer with certainty regarding the examinedissue at an earlier point than a post-filingexamination. These procedures benefit bothtaxpayers and the Service by improving thequality of tax compliance while reducingcosts, burdens, and delays. Unlike letter rul-ings and other forms of written advice pro-vided by the Offices of the Associate ChiefCounsels (see Rev. Proc. 2016–1, 2016–1I.R.B. 1, or its successor), a PFA does notdetermine the tax treatment of prospective or

future transactions or events, but only of com-pleted transactions or events whose tax treat-ment has not yet been reported on a return.

SECTION 2. BACKGROUND

.01 In Rev. Proc. 2001–22, 2001–9I.R.B. 745, the Service provided proce-dures for LB&I taxpayers to request anexamination and resolve specific issuesrelating to returns that were neither due(taking into account any extensions oftime to file) nor filed.

.02 Because Rev. Proc. 2001–22 limitedthe eligible years for the PFA program tocurrent or prior taxable years for which taxreturns were neither due nor filed, taxpayersand the Service could not resolve issues formultiple future taxable years or issues re-garding appropriate methodologies for de-termining tax consequences that would af-fect future taxable years. In Rev. Proc.2005–12, 2005–2 I.R.B. 311, the Serviceexpanded the scope of the PFA program byallowing taxpayers and the Service to ad-dress certain issues over a limited number offuture taxable years. In addition, the Servicerevised the domestic and international issueseligible for the PFA program.

.03 In Rev. Proc. 2007–17, 2007–4 I.R.B.368, the Service renewed the PFA programwith minimal changes, clarifying the proce-dures for processing a PFA request and updat-ing the user fee requirements for a PFA. Sec-tion 12 of Rev. Proc. 2007–17 provided thatthe revenue procedure would remain in effectuntil December 31, 2008, unless sooner re-voked, modified, or superseded.

.04 In Rev. Proc. 2009–14, the Serviceprovided guidance which made the exist-ing PFA program permanent.

.05 The objective of the PFA programremains to resolve, before returns are filed,

issues that are likely to be disputed in post-filing audits. This revenue procedure clari-fies and updates the procedures for filing aPFA request. Section 3.09(2) of this revenueprocedure expands the scope of a PFA toinclude issues relating to changes in meth-ods of accounting requested pursuant to theautomatic change procedures. See Rev.Proc. 2015–13, 2015–5 I.R.B. 419 as clari-fied and modified by Rev. Proc. 2015–33,2015–24 I.R.B. 1067. This revenue proce-dure also increases the user fee for requestssubmitted on or after June 3, 2016.

SECTION 3. SCOPE

.01 Eligible taxpayers. This revenueprocedure applies to taxpayers under thejurisdiction of LB&I (or any successoroperating division) that desire to resolve,through a PFA, issues that otherwise maybe the subject of a post-filing examination.

.02 Eligible taxable years.(1) Current, past, and future taxable

years. An eligible taxpayer may request aPFA for the current taxable year, any priortaxable year for which the original taxreturn is not yet due (taking into accountany extensions of time to file) and is notyet filed and, except in the case of a PFAprovided under section 3.09(2), for a lim-ited number of future taxable years.

(2) Agreements for future taxableyears. Agreements for future taxable yearsare limited to four taxable years beyondthe current taxable year and will only beconsidered as part of a request for a PFAfor the current taxable year or a priortaxable year for which the original taxreturn is not yet due and is not yet filed.

.03 Eligible issues generally.(1) Factual issues and well-established

law. The Service will consider entering

May 23, 2016 Bulletin No. 2016–21982

into a PFA on any issue that requireseither a determination of facts or the ap-plication of well-established legal princi-ples to known facts.

(2) Issues that involve a methodology.The Service also will, in general, considerentering into a PFA regarding a method-ology used by a taxpayer to determine theappropriate amount of an item of income,allowance, deduction, or credit.

(3) Issues under the jurisdiction of otherService divisions. The Service will considerentering into a PFA on an issue under thejurisdiction of an operating division of theService other than LB&I, but only with theconcurrence of that operating division.

.04 Relationship of eligible issues toeligible taxable years. An issue also mustrelate to an eligible taxable year or yearsin order to be an eligible issue.

.05 Eligible domestic and eligible in-ternational issues requiring coordinationand consultation with Associate ChiefCounsel. There is no list of eligible do-mestic and international issues. Any do-mestic or international issue that requireseither a determination of facts or applicationof well-established legal principles toknown facts and that is not excluded undersection 3.08 or section 3.09 of this revenueprocedure is likely suitable for a PFA.

The Service may, in its sole discretion,refuse to address an issue in a PFA basedon considerations of sound tax adminis-tration. Before any decision is made toproceed with the taxpayer’s request for aPFA, the Service must coordinate andconsult with the Associate Chief Counselhaving subject matter jurisdiction overany issue proposed to be determined by aPFA. As part of this coordination andconsultation, the Associate Chief Counselmay consider whether the issue is moreappropriately resolved by a letter ruling orother form of written advice from the ap-propriate Associate Chief Counsel office,as described in Rev. Proc. 2016–1, or itssuccessor, and whether the issue is cur-rently one with respect to which the Ser-vice will not, or will not ordinarily, issuea letter ruling. See Rev. Proc. 2016–3,2016–1 I.R.B. 126, Rev. Proc. 2016–7,2016–1 I.R.B. 239, and their successors.

.06 Eligible international issues re-quiring Associate Chief Counsel (Interna-tional) concurrence in execution. Thissubsection lists specific international is-

sues that are likely suitable for a PFA, butalso require that the Associate ChiefCounsel (International) concur with theacceptance of the issue into the PFA pro-gram and execution of the PFA. Eventhough an issue in a particular case ap-pears on this list, the Service may, in itssole discretion, refuse to address that issuebased on considerations of sound tax ad-ministration. The eligible issues are:

(1) whether a unit of the taxpayer’s tradeor business is a qualified business unitwithin the meaning of section 989(a) and theregulations promulgated under that section;

(2) whether the taxpayer is engaged ina trade or business within the UnitedStates (excluding questions under section864(b)(2));

(3) the amount of gross income that iseffectively connected with the conduct bythe taxpayer of a trade or business withinthe United States (See Rev. Proc. 2015–41, 2015–35 I.R.B. 263 (Advance PricingAgreement program));

(4) factual determinations concerningthe extent to which, under section 882(c),deductions are connected with incomethat is effectively connected with the tax-payer’s conduct of a trade or businesswithin the United States; and

(5) whether the taxpayer has a perma-nent establishment in the United States forpurposes of a bilateral income tax conven-tion to which the United States is a partyand, if so, what profits are attributable tothat permanent establishment. See Rev.Proc. 2015–41.

.07 Special provisions for requests oninternational issues. The provisions of thissection apply, in addition to the generallyapplicable provisions of this revenue proce-dure, to any request for a PFA on an issuehaving international implications.

(1) A PFA and any factual informationcontained in the background files is sub-ject to exchange of information under in-come tax treaties or tax information ex-change agreements in accordance with theterms of such treaties and agreements (in-cluding terms regarding relevancy, confi-dentiality, and the protection of trade se-crets). In cases where the exchange ofinformation would be discretionary, infor-mation may be exchanged to the extentconsistent with sound tax administrationand the practices of the relevant foreigncompetent authority.

(2) To minimize taxpayer and govern-mental uncertainty and administrativecost, taxpayers that seek a PFA on aninternational issue are encouraged to seekcompetent authority consideration underthe mutual agreement procedure of anyapplicable United States income tax con-vention. This consideration will be givenafter the PFA is concluded, and the PFAmay be modified to reflect the outcome ofthe mutual agreement procedure.

(3) A taxpayer may request a PFA foran international issue that is the subject ofa previously submitted request for compe-tent authority assistance. The consider-ation of this competent authority requestwill not be suspended during the PFAprocess. If the taxpayer requests a PFAand the previously submitted request forcompetent authority assistance is ongoing,if appropriate, the taxpayer also shouldmake a request for the accelerated com-petent authority procedure as described insection 4.01 of Rev. Proc. 2015–40,2015–35 I.R.B. 236.

.08 Excluded domestic and interna-tional issues. The Service will not enterinto a PFA on the following types of is-sues:

(1) Transfer pricing issues. See Rev.Proc. 2015–41 and its successors;

(2) Except as provided in sections3.09(2) and (3) of this revenue procedure,issues involving a change in accountingmethod. See Treas. Reg. § 1.446–1(e).This includes issues that are or have beenthe subject of a request by, or with respectto, the taxpayer for consent to change amethod of accounting under proceduressuch as Rev. Proc. 2015–13, or its prede-cessors or successors. This also includesissues for which a change in accountingmethod is necessary to resolve the issue.A taxpayer must obtain consent to makean accounting method change by usingapplicable administrative procedures. Seegenerally Rev. Proc. 2015–13, or its suc-cessors;

(3) Issues involving the annual ac-counting period. See Treas. Reg.§ 1.442–1. This includes issues that are, orhave been, the subject of a request by, orwith respect to, the taxpayer for permis-sion to adopt, change, or retain an annualaccounting period under procedures suchas Rev. Proc. 2002–39, 2002–22 I.R.B.1046 (as clarified and modified by Notice

Bulletin No. 2016–21 May 23, 2016983

2002–72, 2002–46 I.R.B. 843, and asmodified by Rev. Proc. 2003–34,2003–18 I.R.B. 856), or an applicationfiled under automatic procedures such asRev. Proc. 2006 – 45, 2006 – 45 I.R.B.851, as clarified and modified by Rev.Proc. 2006 – 46, 2006 – 45 I.R.B. 859,and Rev. Proc. 2007– 64, 2007– 42I.R.B. 818, or their predecessors or suc-cessors. This also includes issues forwhich a ruling regarding an annual ac-counting period is necessary to resolvethe issue;

(4) Issues of reasonable cause, due dil-igence, good faith, clear and convincingevidence, or any other similar standardunder Subtitle F (Procedure and Admin-istration) of the Internal Revenue Code;

(5) Issues involving the applicability ofany penalty or criminal sanction;

(6) Issues that are, or will be, the sub-ject of a pending or proposed request for adetermination letter, technical advicememorandum, or letter ruling issued to, orregarding, the taxpayer;

(7) Issues for which the taxpayer pro-poses a resolution that is contrary to aletter ruling, determination letter, techni-cal advice memorandum, or closing agree-ment previously issued to, or regarding,the taxpayer;

(8) Issues for which the taxpayer pro-poses a resolution that is contrary to aposition proposed by the Service in re-sponse to a request for a letter ruling ordetermination letter that was withdrawnby the taxpayer;

(9) Issues that are the subject of pend-ing litigation between the Service and thetaxpayer for an earlier taxable year;

(10) Issues designated for litigation foran earlier taxable year of the taxpayer bythe Office of Chief Counsel;

(11) Issues that involve a tax shelterdescribed in section 6662(d)(2)(C)(ii);

(12) Issues that require the Service todetermine whether the taxpayer, ratherthan another entity, is the common lawemployer; and

(13) Issues relating to transactions thathave not yet occurred, regardless ofwhether the issue otherwise would qualifyas one on which the Service will issueletter rulings or other forms of writtenguidance as described in Rev. Proc.2016–1 and successor revenue proce-dures.

.09 Methods of accounting.(1) A PFA may not be used to obtain

consent to change a taxpayer’s method ofaccounting. Section 3.09(2) of this reve-nue procedure provides when the Servicemay enter into a PFA for issues relating toa change in method of accounting. Section3.09(3) of this revenue procedure provideswhat change in accounting method issuesmay be addressed in a PFA. A change inmethod of accounting generally includes achange in an overall plan of accounting ora change in the treatment of any materialitem, which is any item that involves theproper time for the inclusion of the item inincome or the taking of the item as adeduction, or both. See Rev. Proc. 2015–13, section 2.

(2) When a change in method of ac-counting issue may be eligible for a PFA.

(a) If the Service has issued a letterruling granting consent to make a non-automatic change under Rev. Proc. 2015–13, or its predecessor or successor, a tax-payer may request and the Service mayenter into a PFA with respect to the ap-proved change in method of accounting.

(b) If a taxpayer has timely filed the re-quired copy of Form 3115 to request an auto-matic change under section 6.03(1)(a)(i)(B),6.03(1)(a)(ii), or 6.03(1)(a)(iii) of Rev. Proc.2015–13, or its predecessors or successors,the taxpayer may request, and the Servicemay enter into, a PFA with respect to therequested change in method of accounting.

(3) What change in accounting methodissues may be addressed in a PFA.

(a) A PFA may include determinationsdescribed in section 12 of Rev. Proc.2015–13 or a similar provision of its pre-decessor or successor. Thus, for example,a taxpayer may request and the Servicemay enter into a PFA with respect to theamount of the section 481(a) adjustmentand the implementation of the change inmethod of accounting in accordance withall the applicable provisions for thechange in method of accounting.

(b) A PFA under this provision mayonly apply to the taxable year of changeand may not apply to any other taxableyears, except that a determination of theamount of the section 481(a) adjustmentunder section 7.02 of Rev. Proc. 2015–13,or a similar provision of its predecessor orsuccessor, shall apply to any other taxable

year for which such amount is taken intoaccount (i.e., any spread period).

.10 Definition of taxpayer. For pur-poses of section 3 of this revenue proce-dure, any reference to the taxpayer alsoincludes a related taxpayer and any pre-decessor of the taxpayer or a related tax-payer. A related taxpayer is one relatedwithin the meaning of section 267 or amember of an affiliated group within themeaning of section 1504 that includes thetaxpayer. A predecessor is an entity forwhose tax liability the taxpayer or a re-lated taxpayer is or was primarily or sec-ondarily liable.

SECTION 4. REQUESTING A PRE-FILING AGREEMENT

.01 Required information. A requestfor a PFA must contain the following in-formation:

(1) Names, addresses, telephone num-bers, and taxpayer identification numbersof all interested parties;

(2) The name, title, address, and tele-phone number of a person to contact. Ifthe person to contact is an authorized rep-resentative of the taxpayer, a properly ex-ecuted Form 2848, Power of Attorney andDeclaration of Representative, must ac-company the request;

(3) The annual accounting period andthe overall method of accounting (for ex-ample, cash receipts and disbursements oraccrual) for maintaining the accountingbooks and filing the federal income taxreturns of all interested parties;

(4) The location of the taxpayer’s taxstaff and records;

(5) A brief description of the taxpay-er’s business operations, including theprincipal business activity code used bythe taxpayer on its last filed tax return;

(6) The taxable year(s) for which thePFA is sought, the last date on which thetaxpayer may file (with extensions) atimely return for that year (or for the firstof those taxable years), and, if earlier, thedate on which the taxpayer intends to filethat return; and

(7) The dollar amount of assets re-flected on the most recently filed tax re-turn.

.02 Specific descriptions of issues. Arequest for a PFA should also contain aseparate written statement for each pro-posed issue that concisely:

May 23, 2016 Bulletin No. 2016–21984

(1) Describes the issue;(2) Summarizes all the facts that are

relevant and material to the issue and, inthe case of agreements for future taxableyears, any related factual assumptions thatmay be appropriate (See section 7.02(2),below);

(3) States whether the issue involves anitem or transaction in which two or morepersons may take contrary positions (a“whipsaw” issue);

(4) Summarizes all relevant legal au-thorities, including citations to specificsections of the Internal Revenue Code,income tax regulations, case law, tax trea-ties, and other authorities, and discusseswhy the issue is an eligible issue, as de-fined in section 3 of this revenue proce-dure;

(5) Summarizes and discusses the im-plications of any known authorities thatmay be contrary to the position advanced,such as legislation (or pending legisla-tion), court decisions, regulations, reve-nue rulings, revenue procedures, notices(including notices of proposed rulemak-ing), or announcements;

(6) Discusses whether and how thePFA will affect taxable years before orafter the taxable year for which the PFA issought;

(7) Describes any proposed methodol-ogy to be used;

(8) Discusses whether the issue quali-fies for mutual agreement procedure con-sideration under any United States incometax treaty, specifies the treaty, and stateswhether the taxpayer previously applied,or will apply, for competent authority as-sistance with respect to the issue for theyear or years in question or any prior year;

(9) States whether the taxpayer has, forthe current taxable year or any prior tax-able year, requested a letter ruling (includ-ing a request for consent to a change inmethod of accounting or a request toadopt, change, or retain an annual ac-counting period), determination letter, ortechnical advice on the issue;

(10) Discusses whether the issue canreasonably be resolved by the earliest dateon which the taxpayer intends to file anyrelevant tax return; and

(11) Describes the availability, organi-zation, and location of the records andother information that substantiate the tax-payer’s proposed position on the issue.

.03 Perjury statement. A request for aPFA, and any supplemental submissions(including additional documents), mustinclude a declaration, signed by a personcurrently authorized to sign the taxpayer’sfederal income tax return, in the followingform:

Under penalties of perjury, I declarethat I have examined this request,including accompanying docu-ments, and to the best of my knowl-edge and belief, the facts presentedin support of the request for thePre-Filing Agreement are true, cor-rect, and complete.

.04 Agreement regarding examinationor inspection of records. The request for aPFA also must contain a statement by thetaxpayer in the following form:

The taxpayer agrees that the reviewof records and information underthe PFA procedures does not consti-tute an inspection within the mean-ing of section 7605(b) and will notpreclude or impede (under section7605(b) or any administrative pro-visions adopted by the Service) theService from later examining anyreturn or inspecting any records.The taxpayer further agrees thatprocedural restrictions, such as pro-viding notice under section 7605(b),do not apply to actions taken underthe PFA procedures.

.05 Signature. The request for a PFAmust be signed by the taxpayer or a rep-resentative properly authorized by the tax-payer in an accompanying Form 2848,Power of Attorney and Declaration ofRepresentative.

.06 Where to submit request.(1) In the case of a taxpayer whose tax

return for any taxable year is currentlyunder examination by LB&I, a request fora PFA should be submitted to the LB&ITeam or Case Manager in charge of theexamination; or

(2) In the case of a taxpayer who has notax returns under examination for any tax-able year, a request for a PFA should besent by any of the following methods:

(a) mail to the following address:Internal Revenue ServiceAttn: LB&I: PFA Program Analyst1111 Constitution Avenue, NW, Room

1137Washington, DC 20224;

(b) facsimile transmission to the atten-tion of the PFA Program Analyst at (855)842-0364 (toll-free call); or

(c) electronic transmission to [email protected].

SECTION 5. SELECTINGTAXPAYERS FOR THE PFAPROGRAM

.01 Jurisdiction of LB&I Practice AreaDirector and coordination and consulta-tion with the Associate Chief Counsel. TheLB&I Practice Area Director (or any sub-sequently created equivalent positionwithin the LB&I operating division) hav-ing jurisdiction over the taxpayer, aftercoordination and consultation with theAssociate Chief Counsel having subjectmatter jurisdiction over any issue pro-posed to be determined by a PFA, willdecide whether to accept the taxpayer’srequest for a PFA. (For purposes of thisrevenue procedure, the term “LB&I Prac-tice Area Director” includes a duly autho-rized designee of an LB&I Practice AreaDirector.). In general, the Associate ChiefCounsel will respond within 10 businessdays to a request for coordination andconsultation to proceed with the PFA.

.02 Criteria for selection. The criteriafor selecting taxpayers to participate in thePFA program include, but are not limitedto:

(1) Whether the specific issue pre-sented by the taxpayer’s facts is an eligi-ble issue under section 3 of this revenueprocedure and is otherwise suitable for thePFA program;

(2) The direct or indirect impact of aPFA upon other years, issues, taxpayers,or related cases;

(3) Whether Service resources areavailable;

(4) Whether the taxpayer is willing andable to dedicate sufficient resources to thePFA process;

(5) Whether the PFA is likely to resultin two or more persons taking contrarypositions on an item or transaction (a“whipsaw” issue);

(6) The time remaining until the duedate and expected filing date, if earlierthan the due date, of the earliest return towhich the PFA relates; and

(7) The overall probability of complet-ing the process and entering into a PFA by

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the proposed date for filing the earliestreturn to which the PFA relates.

Early submission of a request will fa-cilitate completion of a PFA before anyassociated tax returns become due. As aresult, early requests are more likely to beselected for the PFA program and the Ser-vice urges taxpayers to submit PFA re-quests as early as possible.

.03 Notification. A representative ofLB&I will contact the taxpayer within 15business days of actual receipt of the tax-payer’s request for a PFA to acknowledgethat the Service has received the request.After a PFA request is received, a repre-sentative of LB&I will inform the tax-payer in writing whether the request hasbeen selected for the PFA program andthe issues the Service will consider.

.04 Requests not accepted. A taxpayermay not appeal the Service’s decision notto accept a request for a PFA. A taxpayernot selected for the PFA program remainseligible for other early issue resolutionprocedures, including the Accelerated Is-sue Resolution (AIR) program. See Rev.Proc. 94–67, 1994–44 I.R.B. 13.

SECTION 6. PROCESSING AREQUEST FOR A PFA

.01 Planning. If the Service accepts thetaxpayer’s request for a PFA, a represen-tative of LB&I will contact the taxpayerand schedule an orientation meeting withthe taxpayer and examination personnel todiscuss the PFA process and explain theroles and responsibilities of each partici-pant. Immediately after the orientationmeeting, the taxpayer and the Serviceshould meet to formulate a plan and time-line that will result in a thorough devel-opment of the facts and a successful res-olution of the issues before any associatedtax returns are due. During the planningphase and throughout the PFA process,the taxpayer must provide information re-quested by the Service and assist the Ser-vice in the timely and efficient resolutionof the examined issues. If, at any timeafter a request for a PFA has been ac-cepted, the facts that are relevant and ma-terial to the request for a PFA significantlychange or, in the case of proposed agree-ments for future taxable years, any factualassumptions that may be appropriate sig-nificantly change, the taxpayer must

promptly inform the Service through theexamination team assigned to the PFA.

.02 Continuing coordination. After arequest for a PFA has been accepted, theLB&I Practice Area Director having juris-diction over the PFA request will, throughthe examination team and local counselassigned to the PFA, coordinate and con-sult with the Associate Chief Counselhaving subject matter jurisdiction over theissue proposed to be determined by thePFA to ensure that the issue remains suit-able for a PFA. The LB&I Practice AreaDirector will, through the examinationteam and local counsel assigned to thePFA, inform the Associate Chief Counselif, at any time after a request for a PFAhas been accepted, the facts that are rele-vant and material to the issue significantlychange or, in the case of agreements forfuture taxable years, any factual assump-tions that may be appropriate significantlychange.

.03 Drafting. After the development ofthe facts and issues, the Team or CaseManager will meet informally with thetaxpayer to determine whether the partiesagree on a PFA. If the parties reach agree-ment, the taxpayer will work with theService to prepare the initial draft of thePFA. Except as provided in section 3.06,the Associate Chief Counsel having sub-ject matter jurisdiction over the issue inthe PFA need not execute or give finalapproval to the proposed PFA; however,upon execution of the PFA, the PFA Pro-gram Analyst will immediately forward acopy of the PFA to the office of thatAssociate Chief Counsel.

.04 Return filing requirements. TheService’s acceptance of a taxpayer’s re-quest for a PFA does not suspend or waivethe normal filing requirements for any taxreturns that may be affected by the pro-posed PFA.

.05 TEFRA taxpayers. If the proce-dures set forth in sections 6221 through6234 apply to the taxpayer requesting thePFA and the issue determined by the PFAis a partnership item as defined in section6231, the PFA process will be terminatedfor that issue if no agreement is reachedwith all partners by the date that is 30business days before the due date for thepartnership return (taking into accountany extensions of time to file that may bein effect).

.06 Execution prior to filing. If a PFAis executed before a tax return is filed, thetaxpayer must report the issues deter-mined by the PFA according to the termsand conditions of the PFA. A copy of thePFA must be attached to the tax return.

.07 Execution after filing. If the Serviceand the taxpayer do not reach agreementon an issue before the taxpayer files anassociated tax return, the Service and thetaxpayer may still attempt to resolve theissue and enter into a PFA. If the filedreturn is inconsistent with the terms andconditions of the contemplated PFA, thetaxpayer must agree to file an amendedreturn consistent with those terms andconditions. A post-filing PFA should statewhether the taxpayer is required to file anamended return. It should further state thatthe Service may assess additional tax due,if any, if an amended return is not filed.The taxpayer must attach a copy of thePFA to any amended return.

SECTION 7. NATURE AND EFFECTOF A PFA

.01 Criteria for issuance. An autho-rized Service official may execute a PFAif that official determines that

(1) Entering into the PFA is consistentwith the goals of the PFA program;

(2) The resolution of issues in the PFAreflects well-settled legal principles andcorrectly applies those principles to thefacts established by the examination team;

(3) The issues determined by the PFAare eligible issues under section 3 of thisrevenue procedure;

(4) Any methodology approved for useby a taxpayer to determine the appropriateamount of an item of income, allowance,deduction, or credit has a documented fac-tual basis; and

(5) There is an advantage in having theissues permanently and conclusively re-solved for the taxable years covered bythe PFA, or the taxpayer shows good andsufficient reasons for desiring a PFA andthe United States will suffer no disadvan-tage if the agreement is executed.

.02 Form and content.(1) A PFA that makes determinations

for the current taxable year (and any priortaxable year for which a return is not yetdue) is a closing agreement under section7121. The form and content of this type of

May 23, 2016 Bulletin No. 2016–21986

PFA must comply with Rev. Proc. 68–16,1968–1 C.B. 770.

(2) A PFA that makes a determinationfor one or more future taxable years aswell as for the current taxable year (andany prior taxable year for which a return isnot yet due) is a non-statutory agreement.Although not a closing agreement undersection 7121, this type of PFA is a bindingcontract between the Service and a tax-payer. It is subject to any legislative en-actment that is applicable to the taxableyears to which the PFA relates. There isno prescribed format for such an agree-ment. The parties to a non-statutory agree-ment may, by mutual consent (and, if ap-plicable, the further mutual agreementbetween the United States and any treatypartner that has entered into a mutualagreement that is a basis for the PFA),modify or terminate the agreement. A tax-payer who wants to modify or terminate anon-statutory agreement should submit arequest to the office that originally pro-cessed the taxpayer’s request for a PFA.The parties to a non-statutory agreementalso may condition its determinations onthe continuing validity of certain statedassumptions. A “stated assumption” is anyfact (whether or not within the control ofthe taxpayer) related to the taxpayer, athird party, an industry, or business andeconomic conditions whose continued ex-istence is material to the determinations ofthe PFA. A stated assumption might in-clude, for example, a particular mode ofconducting business operations. If a statedassumption is no longer valid, a non-statutory agreement conditioned on suchstated assumption will terminate as of thefirst day of the taxable year in which thestated assumption is no longer valid.

(3) A PFA concerning international is-sues will not be subject to the speciallimitation of section 6.05(2), Judicial De-terminations and Litigation Settlements,of Rev. Proc. 2015–40, which sets forththe effect of a closing agreement on theprocedure for competent authority consid-eration under the mutual agreement pro-cedure of United States income tax con-ventions.

.03 Methods and periods of account-ing.

(1) A PFA does not constitute the con-sent of the Commissioner under section446(e) to any change in method of ac-

counting or the approval under section442 of any adoption, change, or retentionof an annual accounting period by thetaxpayer.

(2) A PFA does not constitute a finaldetermination regarding the adoption,change, or retention of an annual account-ing period by the taxpayer,

(3) A PFA does not constitute a finaldetermination regarding the methods ofaccounting of the taxpayer for any taxableyear, except to the extent authorized bysection 3.09.

(4) A PFA authorized under section3.09 must include the following agree-ment:

Nothing in this agreement precludesthe taxpayer from requesting, or the Ser-vice from requiring, a change in the tax-payer’s method of accounting for yearsafter the year of change.

SECTION 8. WITHDRAWAL

.01 At any time prior to the executionof the PFA, either the taxpayer or theService may withdraw from considerationall or part of the request for a PFA. Thewithdrawal must be in writing and signedby the party initiating the withdrawal, i.e.,the taxpayer or his authorized representa-tive or the LB&I Practice Area Director.

.02 Notwithstanding the withdrawal byeither the taxpayer or the Service of any orall the issues that are the subject of therequest for a PFA, the taxpayer’s agree-ment under section 4.04 of this revenueprocedure will remain in effect.

SECTION 9. NO PFA EXECUTED

.01 Post-filing procedures. If the Ser-vice and the taxpayer do not agree uponand execute a PFA that resolves an issue,either before or after the filing of the taxreturn to which the PFA relates, and theService subsequently disagrees with thetaxpayer’s treatment of the issue on thetax return, the taxpayer and the Servicemay continue their efforts to reach anagreement using post-filing procedures,such as the AIR procedures under Rev.Proc. 94–67. This continuation of the pro-cess does not require a new application.

.02 Administrative appeals. If the Ser-vice and the taxpayer are unable to resolvean issue by a PFA or an AIR agreement,the taxpayer may pursue an administrative

appeal either by requesting an early refer-ral to Appeals under the procedures setforth in Rev. Proc. 99–28, 1999–29 I.R.B.109, or by protesting any proposed defi-ciency related to the issue.

SECTION 10. USER FEE

.01 Taxpayers subject to fees. Taxpay-ers are subject to a user fee only if they areselected to participate in the PFA pro-gram.

.02 Amount of fee. The user fee fortaxpayers selected to participate in thePFA program is currently $50,000. SeeRev. Proc. 2016–1, 2016–1 I.R.B. 1. Theuser fee will increase to $134,300 for PFArequests submitted on or after June 3,2016, and to $218,600 for PFA requestssubmitted on or after January 1, 2017. Afee will be assessed for each separate anddistinct issue. The orientation meeting orthe first substantive meeting with the tax-payer to discuss the PFA issues will nottake place until after the fee is received.

.03 Time and method of payment. Pay-ment of the user fee must be made within15 business days of notification that theissues have been selected for the PFAprogram. Payment must be made electron-ically by going to www.pay.gov. If pay-.gov is unavailable or payment is beingmade from a foreign bank account, pleasecontact the PFA Program Analyst at (202)317-3157 (voice) (not a toll-free call) or(855) 842-0364 (fax) (toll-free call).

.04 Withdrawal. Notwithstanding thewithdrawal by either the taxpayer or theService of any or all of the issues in therequest for a PFA after acceptance of therequest, the user fee paid by the taxpayergenerally will not be refundable. A refundor waiver of the user fee will not be en-tertained unless a hardship has occurred(for example, a disaster loss) or if othercircumstances beyond the control of thetaxpayer exist. The LB&I Practice AreaDirector has discretion in granting a re-quest for a refund of a user fee based onconsiderations of sound tax administra-tion.

SECTION 11. DISCLOSURE

PFAs are agreements described in sec-tion 6103(b)(2)(D). A PFA and the infor-mation generated or received by the Ser-vice during the PFA process constitute

Bulletin No. 2016–21 May 23, 2016987

return information, which shall be confi-dential, except when disclosure is autho-rized by the Internal Revenue Code. Con-sistent with the restrictions of section6103, the Service will continue to publishannual reports summarizing the operationof the PFA program. PFAs are not writtendeterminations available for public in-spection under section 6110. PFAs areexempt from disclosure to the public un-der the Freedom of Information Act.

SECTION 12. EFFECTIVE DATEAND DURATION OF PROCEDURE

This revenue procedure is effective forrequests for PFAs received on or afterMay 4, 2016.

SECTION 13. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2009–14 is modified andsuperseded.

Rev. Proc. 2016–1 is modified bychanging the PFA user fee in Appendix A(A)(7) from $50,000 to $134,300 for PFArequests submitted on or after June 3,2016.

SECTION 14. RECORD-KEEPINGREQUIREMENTS

.01 No aspect of the PFA process willaffect the record-keeping requirementsimposed by any section of the InternalRevenue Code.

.02 The taxpayer must maintain a copyof the PFA supporting documents andbooks of account and records to enable theService to ensure the taxpayer’s compli-ance with the PFA. These records may bespecified in the PFA itself or in separateagreements.

SECTION 15. PAPERWORKREDUCTION ACT

The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507) under the controlnumber 1545-1684.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less it displays a valid OMB control

number. The collections of information inthis revenue procedure are in sections 4, 6,and 14. The information collected undersection 4 is required to provide the Ser-vice with the information necessary to de-termine which taxpayers should be in-cluded in the PFA program. Theinformation collected under section 6 willbe used to resolve the taxpayer’s issue andto support any PFA entered into betweenthe taxpayer and the Service. The record-keeping requirements under section 14will be used for tax administration. Thecollections of information under sections4 and 6 are voluntary. Once a PFA isentered into, the record-keeping require-ments under section 14 are mandatory.The likely respondents are businesses orother for-profit institutions.

The estimated total annual reportingand/or record-keeping burden is 13,134hours.

The estimated annual burden per re-spondent varies from 5 hours to 1,092hours, depending on whether a taxpayerapplying to the PFA program is acceptedinto the program. The estimated annualburden per respondent for taxpayers whoapply to the PFA program and are ac-cepted is 1,092 hours. The estimated an-nual burden per respondent for taxpayerswho apply to the PFA program and are notaccepted is 5 hours. The estimated annualnumber of taxpayers who apply to thePFA program and are accepted is 12. Theestimated annual number of taxpayerswho apply to the PFA program and are notaccepted is 6. The estimated total annualnumber of applicants and/or recordkeep-ers is 18.

The estimated annual frequency of re-sponses is on occasion.

Books or records relating to a collec-tion of information must be retained solong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. § 6103.

SECTION 16. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Maria Del Pilar Puerto of theOffice of Associate Chief Counsel (Proce-dure & Administration). For further infor-mation about this revenue procedure, con-

tact Melanie Perrin, PFA ProgramAnalyst, at (202) 317-3157 (voice) (not atoll-free call), (855) 842-0364 (fax) (toll-free call).

26 CFR § 601.105: Examination of returns andclaims for refund, credit, or abatement; determina-tion of correct tax liability.(Also: Part I, § 852)

Rev. Proc. 2016–31SECTION 1. PURPOSE

This revenue procedure provides tem-porary relief for certain money marketfunds (MMFs) that receive contributionsfrom their advisers as the MMFs transi-tion to comply with Securities and Ex-change Commission (SEC) rules thatchange how certain MMF shares arepriced. See Money Market Fund Reform;Amendments to Form PF (79 FR 47736)(SEC MMF Reform Rules).

SECTION 2. BACKGROUND

.01 An MMF is a type of investmentcompany registered under the InvestmentCompany Act of 1940 (1940 Act) andregulated as an MMF under Rule 2a–7under the 1940 Act (17 CFR 270.2a–7)(Rule 2a–7). (The SEC MMF ReformRules amended Rule 2a–7.) MMFs havehistorically sought to keep stable (typi-cally at $1.00) the prices at which theirshares are distributed, redeemed, and re-purchased. The securities that Rule 2a–7permits an MMF to hold generally resultin no more than minimal fluctuations inthe MMF’s net asset value per share(NAV).

.02 Before the SEC MMF ReformRules amended Rule 2a–7, MMFs meet-ing the requirements of Rule 2a–7 weregenerally permitted to value all of theirassets at acquisition cost, with certain ad-justments (amortized cost valuationmethod), and to price their shares byrounding the resulting NAV to the nearest1 percent (penny-rounding pricing). Thesemethods have enabled MMFs to maintainstable share prices in almost all circum-stances.

.03 The SEC MMF Reform Rules barthe use of the amortized cost valuationmethod and penny-rounding pricing forcertain MMFs and require these MMFs to

May 23, 2016 Bulletin No. 2016–21988

value their assets using market factors andto round their price per share to the near-est basis point, which is the fourth decimalplace in the case of a fund with a $1.0000share price. MMFs that value their assetsin this way and round to this level ofaccuracy are called “floating-NAVMMFs.” MMFs that invest 99.5 percent ormore of their assets in government secu-rities or repurchase agreements collateral-ized fully with government securities orcash items (government MMFs) or limitall of their beneficial owners to naturalpersons (retail MMFs) may continue touse the amortized cost valuation methodand penny-rounding pricing (stable-NAVMMFs). An MMF that is not a govern-ment MMF or a retail MMF must convertto a floating-NAV MMF no later thanOctober 14, 2016. An MMF converting toa floating NAV may receive (from, forexample, the MMF’s adviser) a contribu-tion so that when the MMF transitions toa floating NAV all shareholders receivethe same value per share at the time of thetransition (a top up contribution).

.04 The Treasury Department and theInternal Revenue Service (Service) issuedproposed regulations under sections 446and 6045 of the Internal Revenue Code(Code) in 2014 (79 FR 43694) (the 2014proposed regulations) providing a permis-sible, simplified method of accounting forgains and losses on shares in MMFs andclarifying reporting requirements forshares in MMFs. The Service receivedwritten comments responding to the 2014proposed regulations. One commenterstated that it believes that sponsors of anMMF that will become a floating-NAVMMF may wish to make contributions tothe MMF to raise the MMF’s NAV to$1.0000 before the MMF’s NAV beginsto float. The commenter added that con-tributions may be made in other transi-tional contexts, such as the merger, con-version, or other reorganization of one ormore MMFs, to facilitate compliance withthe SEC MMF Reform Rules.

.05 In the preamble to the SEC MMFReform Rules, the SEC provided exemp-

tive relief for certain reorganizations andinvoluntary redemptions undertaken inconnection with beginning to comply withthe amendments to Rule 2a–7. Providedcertain conditions are met, MMFs maytherefore carry out these reorganizationsand redemptions without seeking the sep-arate exemptive relief from the SEC thatwould ordinarily be required. See 79 FR at47798–99.

.06 Under the SEC MMF ReformRules, an MMF must disclose the occur-rence of certain events, including the pro-vision to the fund by the fund’s sponsor(or certain other persons) of “any form offinancial support to the fund (includingany (i) capital contribution, . . .).” 17 CFR274.222. Specifically, if an MMF receivesfinancial support from its sponsor, it musttimely report this support on Form N-CR,“Current Report: Money Market FundMaterial Events,” and must disclose thesupport prominently on its website. See 17CFR 270.30b1–8; 17 CFR 270.2a–7(h)(10)(v).

.07 The staff of the SEC Division ofInvestment Management has stated that itwill not object if certain transactions thatprovide financial support are not reportedon Form N-CR. In particular, if a top upcontribution occurs as part of a transitionfor money market funds to implement thefloating NAV reform before the October14, 2016, compliance deadline, the staffhas stated that it would not object if thetransaction is not reported on Form N-CR,because such transactions are primarilyintended to bring a fund into compliancewith revised money market fund regula-tions in a way that avoids unfair results ordilution.1

.08 An MMF must meet distributionrequirements to be taxed as a regulatedinvestment company (RIC) under part 1 ofsubchapter M and to avoid the impositionof an excise tax under section 4982 of theCode. Section 852(b)(1) imposes a tax,computed under section 11, on a RIC’sinvestment company taxable income(ICTI). Section 852(b)(2) defines ICTI astaxable income with several adjustments,

including the exclusion of net capital gainand the allowance of a deduction for div-idends paid. For an MMF to be taxed as aRIC, section 852(a)(1) requires theMMF’s deduction for dividends paid (de-termined without regard to capital gaindividends) to equal or exceed the sum of90 percent of the RIC’s ICTI for the tax-able year (determined without regard tothe deduction for dividends paid) and 90percent of the excess of the RIC’s interestincome excludable from gross income un-der section 103(a) over the RIC’s deduc-tions disallowed under sections 265 and171(a)(2).

.09 Section 4982(a) imposes an excisetax on a RIC for each calendar year equalto 4 percent of the excess of the requireddistribution for the calendar year over thedistributed amount for the calendar year.Under section 4982(b), a RIC’s requireddistribution for a calendar year generallyis the sum of 98 percent of the RIC’sordinary income for the calendar year,plus 98.2 percent of the RIC’s capital gainnet income for the 1-year period endingon October 31 of the calendar year.2 Un-der section 4982(c), the distributedamount for a calendar year generally is thesum of the RIC’s deductions for dividendspaid during the calendar year and anyamount on which tax is imposed undersection 852(b)(1) or (b)(3)(A) for a tax-able year ending in the calendar year.3

Under section 4982(c)(4), if a RIC has anamount taxed under section 852(b)(1) or(b)(3)(A) for a taxable year and the RICmakes estimated tax payments on thatamount during the calendar year in whichthe taxable year begins, the RIC may electto include that amount in the RIC’s dis-tributed amount for that calendar year (in-stead of the calendar year in which thetaxable year ends).

.10 If the distribution requirements insections 852 and 4982 apply to an advisercontribution, it may be impossible or im-practical for the advisers of some MMFsto make contributions that raise theMMFs’ NAVs to $1.0000, so that share-holders will receive the same value per

1Top up contributions are discussed in a website posting entitled, “2014 Money Market Fund Reform Frequently Asked Questions.” See 2014 Money Market Fund Reform Frequently AskedQuestions (March 18, 2016, revision) http://www.sec.gov/divisions/investment/guidance/2014-money-market-fund-reform-frequently-asked-questions.shtml.

2Section 4982(b) also contains rules for increasing the required distribution for a calendar year that follows a calendar year in which there is a shortfall. Section 4982(e) defines the terms“ordinary income” and “capital gain net income” for purposes of section 4982 and provides additional rules.

3Section 4982(c) also contains rules for determining the dividends paid during a calendar year and for adjusting the distributed amount for a calendar year that follows a calendar year inwhich there is an overdistribution.

Bulletin No. 2016–21 May 23, 2016989

share both before and after the transitionto a floating NAV. If contributions froman adviser are subject to the distributionrequirements, then, to increase the valueof an MMF’s portfolio by a given amount,an adviser may need to contribute morethan ten times that amount to “gross up”the contribution for both a 90-percent dis-tribution requirement and tax on the un-distributed amount. Comments submittedin response to the 2014 proposed regula-tions recommended guidance that wouldfacilitate contributions to raise the MMF’sNAV to $1.0000. Specifically, a com-menter recommended that if a sponsormakes contributions to an MMF beforeOctober 14, 2016, the contributions wouldneither result in income or gain to theMMF nor reduce the basis of the MMF’sassets.

.11 The Treasury Department and theService believe that it is in the interest ofsound tax administration to apply section852 in a manner that will support theefforts of the staff of the SEC Division ofInvestment Management to facilitate asmooth transition to compliance with SECMMF Reform Rules. The Treasury De-partment and the Service believe that ex-cluding certain adviser contributions fromICTI for purposes of the distribution re-quirements in section 852(a) is importantto facilitate those contributions but do notbelieve the contributions should be ex-cluded from the RIC’s income for otherfederal tax purposes.

SECTION 3. SCOPE

This revenue procedure applies to a topup contribution that is received by anMMF as part of a transition to implementthe floating NAV reform before the Octo-ber 14, 2016, compliance deadline, as de-scribed in section 2.07 of this revenueprocedure.

SECTION 4. APPLICATION

If an MMF receives a contribution thatis described in section 3 of this revenueprocedure, the Service will not challengethe MMF’s treatment of the contribution

as an amount that is included in ICTI forpurposes of section 852(b)(2) but is ex-cluded from ICTI for purposes of section852(a)(1). The treatment described in thissection 4 applies only to contributions de-scribed in section 3 of this revenue proce-dure.

SECTION 5. EXAMPLE

The following example illustrates theoperation of this revenue procedure.

(i) Fund is an MMF that uses a March31 taxable year for federal income taxpurposes. Fund has a stable NAV but isrequired under SEC MMF Reform Rulesto become a floating-NAV MMF beforeOctober 14, 2016. As of April 22, 2016,Fund has 500 million outstanding sharesand assets with a fair market value of$498,000,000. Fund’s published NAV onApril 22, 2016, is $1.00, but Fund’s NAVdetermined using market factors androunded to the nearest basis point is$0.9960. On April 25, 2016, Fund’s in-vestment adviser makes a $3,000,000 con-tribution to Fund that is described in sec-tion 3 of this revenue procedure. Duringits taxable year ending on March 31,2017, Fund has $2,000,000 in ordinaryincome from securities in its portfolio anddistributes $2,000,000 in ordinary divi-dends to its shareholders. Fund has nocapital gains or losses and pays no capitalgain dividends. Fund elects the applica-tion of section 4982(c)(4) for the 2016calendar year. Consistent with that elec-tion, Fund makes an estimated tax pay-ment of $1,020,000 during the 2016 cal-endar year with respect to Fund’s taxableyear ending on March 31, 2017. Thisamount reflects the tax under section852(b)(1) on $3,000,000 of Fund’s ICTIfor that taxable year.

(ii) For its taxable year ending onMarch 31, 2017, Fund has ordinary in-come of $5,000,000. For purposes of sec-tion 852(b)(2), Fund’s ICTI for that yearis $3,000,000, because Fund has a$2,000,000 deduction for dividends paid.The tax on $3,000,000, computed undersection 11, is $1,020,000, which was

timely satisfied by the estimated tax pay-ments that Fund made during 2016.

(iii) For purposes of section 852(a)(1),Fund treated its ICTI as being $2,000,000(excluding the adviser contribution anddisregarding the deduction for dividendspaid). Because Fund distributed$2,000,000 of dividends in that taxableyear, it distributed over 90 percent of theamount that it is treating for purposes ofsection 852(a) as its ICTI. Consistent withsection 4 of this revenue procedure, theService will not assert that Fund failed tosatisfy the distribution requirement in sec-tion 852(a)(1).

(iv) Under section 4982(c)(4)(A)(i),Fund’s distributed amount for 2016 is in-creased by the $3,000,000 with respect towhich Fund made a $1,020,000 estimatedtax payment. Thus, section 4982 does notimpose an excise tax on Fund for 2016.Under section 4982(c)(4)(A)(ii), Fund’sdistributed amount for 2017 will be de-creased by $3,000,000 to avoid double-counting.

(v) After payment of $1,020,000 ofincome taxes, the contribution of$3,000,000 increased the value of Fund’sportfolio to $499,980,000. After this in-crease, Fund’s NAV, rounded to the near-est basis point, is $1.0000.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective forcontributions that are described in section3 of this revenue procedure. Section 3 ofthis revenue procedure does not describeany contribution made after certain MMFsare required to become floating-NAVMMFs.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Grace Cho of the Office ofAssociate Chief Counsel (Financial Insti-tutions & Products). For further informa-tion regarding this revenue procedure con-tact Ms. Cho at (202) 317-6945 (not atoll-free number).

May 23, 2016 Bulletin No. 2016–21990

Part IV. Items of General InterestSection 7428(c) Validationof Certain ContributionsMade During Pendency ofDeclaratory JudgmentProceedings

Announcement 2016–20

This announcement serves notice topotential donors that the organizationlisted below has recently filed a timelydeclaratory judgment suit under section7428 of the Code, challenging revocation

of its status as an eligible donee undersection 170(c)(2).

Protection under section 7428(c) of theCode begins on the date that the notice ofrevocation is published in the InternalRevenue Bulletin and ends on the date onwhich a court first determines that an or-ganization is not described in section170(c)(2), as more particularly set forth insection 7428(c)(1).

In the case of individual contributors,the maximum amount of contributionsprotected during this period is limited to$1,000.00, with a husband and wife being

treated as one contributor. This protectionis not extended to any individual who wasresponsible, in whole or in part, for theacts or omissions of the organization thatwere the basis for the revocation. Thisprotection also applies (but without limi-tation as to amount) to organizations de-scribed in section 170(c)(2) which are ex-empt from tax under section 501(a). If theorganization ultimately prevails in its de-claratory judgment suit, deductibility ofcontributions would be subject to the nor-mal limitations set forth under section170.

Name of Organization Date Suit Filed Effective Date of Revocation Location

Modest Needs Foundation 4/13/2016 1/1/2011 New York, N.Y.

Notice of ProposedRulemaking and Notice ofProposed Rulemaking byCross-reference toTemporary Regulations.

Certified ProfessionalEmployer Organizations;Notice of ProposedRulemaking and Notice ofProposed Rulemaking byCross-Reference toTemporary Regulations.

REG–127561–15


ACTION: Notice of proposed rulemakingand notice of proposed rulemaking bycross-reference to temporary regulations.

SUMMARY: This document containsproposed regulations that set forth the fed-eral employment tax liabilities and otherobligations of persons certified by the IRSas certified professional employer organi-zations (CPEOs) in accordance with pro-visions enacted as part of The StephenBeck, Jr., Achieving a Better Life Expe-rience Act of 2014. The proposed regula-tions also propose to adopt, by cross-

reference, the text of temporaryregulations in the Rules and Regulationssection of this issue of the Internal Rev-enue Bulletin, which relate to the require-ments for applying for, receiving, andmaintaining certification as a CPEO.These proposed regulations will affectpersons who apply to be treated as CPEOsand who are certified by the IRS as meet-ing the applicable requirements. In certaininstances, the proposed regulations willalso affect the federal employment taxliabilities and other obligations of custom-ers of the CPEO.

DATES: Comments and requests for apublic hearing must be received by Au-gust 4, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–127561–15), room5203, Internal Revenue Service, P.O. Box7604, Ben Franklin Station, Washington,D.C. 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. toCC:PA:LPD:PR (REG–127561–15),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, N.W., Wash-ington, D.C. 20224 or sent electronically,via the Federal eRulemaking Portal atwww.regulations.gov (REG–127561–15).

FOR FURTHER INFORMATIONCONTACT: Concerning these proposedregulations, Melissa L. Duce at (202) 317-6798; concerning submissions of com-ments or to request a public hearing, Olu-wafunmilayo Taylor at (202) 317-6901(not toll-free numbers).



The collection of information con-tained in this notice of proposed rulemak-ing has been submitted to the Office ofManagement and Budget for review andapproval in accordance with the Paper-work Reduction Act of 1995 (44 U.S.C.3507(d)). Comments on the collection ofinformation should be sent to the Office ofManagement and Budget, Attn: Desk Of-ficer for the Department of the Treasury,Office of Information and Regulatory Af-fairs, Washington, D.C. 20503, with cop-ies to the Internal Revenue Service, Attn:IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, D.C.20224. Comments on the collection ofinformation should be received by July 5,2016.

Comments are specifically requestedconcerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the Internal

Bulletin No. 2016–21 May 23, 2016991

Revenue Service, including whether theinformation will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation;

How the quality, utility, and clarity ofthe information to be collected may beenhanced;

How the burden of complying with theproposed collection of information maybe minimized, including through forms ofinformation technology; and

Estimates of capital or start-up costs andcosts of operation, maintenance, and pur-chase of services to provide information.

The collection of information in theproposed regulations is in § 31.3511–1(g)and flows from section 3511(g) of theInternal Revenue Code (Code), whichprovides that the Secretary shall developsuch reporting and recordkeeping rules,regulations, and procedures as the Secre-tary determines necessary or appropriateto ensure compliance by CPEOs with sub-title C of the Code. Section 31.3511–1(g)(1) clarifies that the reporting and re-cordkeeping requirements described insubtitle F of the Code that are currentlyapplicable to employers apply to CPEOsthat are treated as employers under§ 31.3511–1(a), and § 31.3511–1(g)(3)(ii)specifically requires a CPEO to file onmagnetic media Form 940, “Employer’sAnnual Federal Unemployment (FUTA)Tax Return,” and Form 941, “Employer’sQUARTERLY Federal Tax Return,”along with all required schedules. The col-lection of information associated withcomplying with such reporting and re-cordkeeping requirements is reflected inthe burden estimates for the relevant re-quirements under subtitle F. The collec-tion of information associated with§§ 31.3511–1(g)(3)(i) and (ii), relating toinformation that CPEOs must report to theIRS regarding their customers, will be re-flected in the burden estimates for newForm 8973, “Certified Professional Em-ployer Organization/Customer ReportingAgreement,” and in the amendments madeto the applicable Schedules R of Forms940 and 941. The collection of informa-tion associated with §§ 31.3511–1(g)(3)(iii) through (vi) relates to require-ments imposed by § 301.7705–2T and arereflected in the burden estimates for thatsection. The collections of information as-

sociated with § 31.3511–1(g)(3)(vii) and(viii), relating to any information the IRSdetermines is necessary to promote com-pliance with respect to credits described insection 3511(d) and any other informationthe Commissioner may prescribe in fur-ther guidance, will be reflected in the fu-ture guidance requesting such informationfrom CPEOs.

The collection of information in§ 31.3511–1(g)(4) of the proposed regu-lations, regarding information a CPEOmust provide to its customers, relates to:(1) an annual requirement to provide cus-tomers with the information necessary toclaim specified credits for which theamount of the credit is determined by ref-erence to the amount of employment taxwages or federal employment taxes; (2) arequirement to notify a customer of anytransfers by the CPEO of the customer’scontract meeting the requirements of sec-tion 7705(e)(2) (CPEO contract) or of anysuspension or revocation of the CPEO’scertification; and (3) if any covered em-ployees are not or cease to be work siteemployees because they perform servicesat a location where the 85 percent thresh-old described in the definition of “worksite employee” in § 301.7705–1(b)(17) isnot met, a requirement to notify the cus-tomer that it may also be liable for federalemployment taxes imposed on remunera-tion remitted by the CPEO to such cov-ered employees. Similarly, § 31.3511–1(g)(5)(i) requires that any CPEO contractbetween a CPEO and a customer must: (1)contain the name and Employer Identifi-cation Number (EIN) of the CPEO fulfill-ing the federal employment tax obliga-tions covered by the contract; (2) requirethe CPEO to provide the notices outlinedin § 31.3511–1(g)(4); (3) describe the in-formation that the CPEO will provide thatis necessary for the customer to claimspecified credits; and (4) specify that theCPEO must notify the customer that itmay also be liable for federal employmenttaxes on remuneration remitted by theCPEO to any employees who are not worksite employees. Further, any serviceagreement described in § 31.3504–2(b)(2)that is not a CPEO contract, must notify(or be accompanied by notification to) theclient that the agreement does not alter theclient’s liability for federal employmenttaxes on remuneration remitted by the

CPEO to the employees covered by theagreement. While a CPEO must providecustomers with the information necessaryto claim the specified credits annually andagree to provide customers and clientswith the described notifications in eachnew CPEO contract or service agreemententered into during a particular taxableyear, the remaining notification obliga-tions outlined in §§ 31.3511–1(g)(4) and(5) relate to other events that are lesspredictable and may be infrequent – suchas transfers of existing CPEO contracts,suspension or revocation of the CPEO’scertification, or the reclassification of em-ployees at a particular work site as non-work site employees. Moreover, the De-partment of the Treasury (TreasuryDepartment) and the IRS expect thatCPEOs participating in this voluntary pro-gram will be able to build upon pre-existing systems and processes throughwhich they communicate with their cli-ents. With regard to the collections ofinformation required in §§ 31.3511–1(g)(4) and (5), the Treasury Departmentand the IRS have reached the followingreporting burden estimates for the ex-pected recordkeepers (which are CPEOs):Estimated number of recordkeepers: 275.

Estimated average annual burdenhours per recordkeeper: 6 hours.Estimated total annual recordkeep-ing burden: 1650 hours.Estimated frequency of collectionsof such information: Periodic.

The collection of information in thetemporary regulations is in§ 301.7705–2T and flows from sections7705(b) and (c), which relate to the re-quirements that a person must satisfy tobecome and remain certified as a CPEO.The collection of information required toapply for and receive certification and tomeet the requirements under§ 301.7705–2T related to posting a secu-rity bond will be reflected in the burdenestimates for Form 14737, “Request forVoluntary IRS Certification of a Profes-sional Employer Organization”; Form14737–A, “Responsible Individual Per-sonal Attestation”; and Form 14751, “Cer-tified Professional Employer OrganizationSurety Bond.” The collection of informa-tion required by §§ 301.7705–2T(j) and(k), relating to periodic verification that

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the CPEO continues to meet the require-ments of § 301.7705–2T and a CPEO’sobligation to report any change that ma-terially affects the continuing accuracy ofany agreement or information that waspreviously made or provided to the IRS,will be published in a future revenue pro-cedure that will prescribe the proceduresrelated to these requirements.

Section 301.7705–2T(e) of the tempo-rary regulations requires a CPEO to pro-vide annually a copy of its annual auditedfinancial statements and an opinion of acertified public accountant (CPA) regard-ing such financial statements. The collec-tion of information required by§ 301.7705–2T(f)(1)(i) relates to quarterlyassertions that the CPEO has withheld andmade deposits of all required federal em-ployment taxes for the calendar quarterand examination level attestations from aCPA stating that such assertion is fairlystated in all material respects. In addition,§ 301.7705–2T(f)(1)(ii) requires a quar-terly statement signed by a responsibleindividual verifying that the CPEO haspositive working capital with respect tothe most recently completed fiscal quarter.While it is expected that CPEOs will gen-erally maintain annual audited financialstatements during the normal course oftheir business, rather than solely as a re-sult of § 301.7705–2T(e), the TreasuryDepartment and the IRS recognize that§ 301.7705–2T(e) may impose new re-porting requirements relating to underly-ing elements of those financial statementsthat will require additional time on thepart of the CPEO and additional review bya CPA. In addition, § 301.7705–2T(f) re-quires CPEOs to submit statements re-garding their working capital and asser-tions and exam level attestations related totheir tax compliance on a quarterly basis.With respect to the collections of informa-tion required in §§ 301.7705–2T(e) and(f), the Treasury Department and the IRShave reached the following reporting bur-den estimates for CPEOs:

Estimated number of recordkeepers:275.

Estimated average annual burden hoursper recordkeeper: 60 hours.

Estimated total annual recordkeepingburden: 16,500 hours.

Estimated frequency of collections ofsuch information: Quarterly.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less it displays a valid control numberassigned by the Office of Managementand Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andreturn information are confidential, as re-quired by 26 U.S.C. 6103.

Background

The Stephen Beck, Jr., Achieving aBetter Life Experience Act of 2014 (theABLE Act), enacted on December 19,2014, as part of the Tax Increase Preven-tion Act of 2014 (Pub. L. 113–295), addednew sections 3511 and 7705 to the Coderelating to the federal employment tax ob-ligations and certification requirements ofa “certified professional employer organi-zation” (CPEO). Additionally, the ABLEAct made conforming amendments to sec-tions 3302, 3303(a), 6053(c), 6652, and7528 relating to obligations, requirements,and penalties applicable to a CPEO. Thisnotice of proposed rulemaking containsproposed regulations under sections 3511and 7705 regarding federal employmenttax obligations of a CPEO and relateddefinitions. This document also proposesto adopt, by cross-reference, temporaryregulations under section 7705 publishedin the Rules and Regulations portion ofthis issue of the Internal Revenue Bulle-tin, which relate to the requirements forapplying for, receiving, and maintainingcertification as a CPEO. The preamble tothe temporary regulations explains thoseregulations and the statutory provisionsthey are designed to implement.

Federal Employment Taxes

When an individual performs servicesfor another person, an employer-employee relationship may exist. Gener-ally, the Code provides that the existenceof an employer-employee relationship isdetermined by applying the usual com-mon law rules to the particular facts andcircumstances of each case. See section3121(d)(2). Under the common law rules,an employment relationship exists when

the person for whom the services are per-formed has the right to control and directthe individual who performs the services,not only as to the result to be accom-plished by the work but also as to thedetails and means by which that result isaccomplished. See §§ 31.3121(d)–1(c),31.3231(b)–1(a)(2), 31.3306(i)–1(b), and31.3401(c)–1(b).

Employers generally are required todeduct and withhold federal income taxand Federal Insurance Contributions Act(FICA) taxes from wages paid to theiremployees under sections 3402(a) and3102(a) and are separately liable for theemployer’s share of FICA taxes undersection 3111. FICA taxes consist of theOld-Age, Survivors, and Disability Insur-ance (OASDI) tax and the Hospital Insur-ance (HI) tax (which includes the addi-tional tax under section 3101(b)(2),known commonly as the Additional Medi-care Tax (AdMT)). The amount of wagesfor OASDI purposes is limited to wagespaid by an employer to an employee dur-ing a calendar year not exceeding the con-tribution and benefit base (as determinedunder section 230 of the Social SecurityAct), which is an annually adjustedamount. Thus, there is a ceiling on thewages subject to OASDI. Accordingly,once an employee’s wages from an em-ployer reach this annually adjustedamount, the OASDI portion of the FICAtax does not apply for the remainder of thecalendar year.

In contrast, there is no ceiling on wagessubject to the HI tax. See sections 3101,3111, and 3121(a). However, under sec-tion 3102(f)(1), employers are only re-quired to withhold AdMT from an em-ployee’s wages to the extent that thosewages exceed $200,000 in a calendaryear. Thus, there is a withholding thresh-old of $200,000 annually on wages sub-ject to AdMT withholding.

Instead of FICA taxes, railroad em-ployers are required to deduct and with-hold Railroad Retirement Tax Act(RRTA) taxes from their employees’compensation and are separately liable forthe employer’s share of RRTA taxes.RRTA taxes consist of tier 1 taxes and tier2 taxes. Tier 1 taxes parallel the OASDIand HI taxes applicable to other employ-ers and employees. Tier 2 taxes consist ofemployer and employee taxes on railroad

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compensation up to the tier 2 contributionbase for the calendar year. See sections3201(a), 3211(a), and 3221(a).

Under the Federal Unemployment TaxAct (FUTA), taxes are imposed on thefirst $7,000 of wages paid to a coveredemployee by an employer during the cal-endar year. See section 3301(2). An em-ployer may take a credit against its FUTAtax liability for its contributions to a stateunemployment fund and, in certain cases,an additional credit for contributions thatwould have been required if the employerhad been subject to a higher contributionrate under state law. See section 3301 etseq.

All taxes imposed under subtitle C ofthe Code, including income tax withhold-ing, FICA, RRTA, and FUTA taxes, arecollectively referred to in this preamble as“federal employment taxes.” The applica-ble contribution bases for FICA, RRTA,and FUTA taxes, collectively, are referredto in this preamble as the “annual wagebase.” Sections 31.3102–1(d), 31.3202–1(e), and 31.3403–1 establish that the em-ployer is the person liable for the with-holding and payment of federalemployment taxes, whether or notamounts are actually withheld.

An employer must file an employmenttax return reporting federal employmenttaxes for each employment tax return pe-riod. Generally, an employer files Form941, “Employer’s QUARTERLY FederalTax Return,” to report wages the em-ployer paid during a quarter of a calendaryear that are subject to federal income taxwithholding and FICA taxes. Wages anemployer pays that are subject to FUTAtax are reported annually on Form 940,“Employer’s Annual Federal Unemploy-ment Tax (FUTA) Return.” Employersthat pay compensation subject to theRRTA tax file Form CT–1, “Employer’sAnnual Railroad Retirement Tax Return,”as well as Form 941, to report federalincome tax withholding. All employersthat pay wages or compensation subject tofederal income tax withholding, FICA tax,or RRTA tax must file Forms W–2,“Wage and Tax Statement,” and FormW–3, “Transmittal of Wage and Tax

Statements,” with the Social Security Ad-ministration (SSA) and furnish a FormW–2 to each employee.

Federal employment taxes generallyapply to all remuneration for services per-formed by an employee for an employer.However, specific exceptions apply toparticular types of remuneration and par-ticular types of services, which may de-pend on the type of employer for whomservices are performed or the nature ofthose services. For example, remunerationpaid by an organization exempt from fed-eral income tax under section 501(a) to anemployee who is paid less than $100 in acalendar year is excluded from the defini-tion of “wages” for FICA purposes, andservices performed in the employ of cer-tain tax-exempt organizations are ex-cluded from the definition of “employ-ment” for FUTA purposes. In addition,various definitions and special rules, rele-vant for purposes of computing the appli-cable annual wage base, apply to certaintypes of employers, employees, and em-ployment relationships.

Furthermore, as noted earlier in thispreamble, remuneration paid by an em-ployer to an employee within any calendaryear is excepted from the OASDI portionof FICA, the equivalent portion of tier 1RRTA, and FUTA taxes to the extent itexceeds the applicable annual wage base.However, the annual wage base applies onan employer-by-employer basis, and,thus, only remuneration received duringany calendar year by an employee fromthe same employer is considered in apply-ing the annual wage bases for purposes ofthe remuneration paid by that employer.See §§ 31.3121(a)(1)–1(a)(3) and31.3306(b)(1)–1(a)(3) for FICA andFUTA taxes, respectively. Similarly, theAdMT withholding threshold applies onlywith regard to remuneration received dur-ing any calendar year by an employeefrom the same employer.

Accordingly, if during a calendar yearthe employee receives remuneration frommore than one employer, generally, boththe annual wage base and withholdingthreshold apply separately to the remuner-ation that the employee received during

that calendar year from each employer.1

Consequently, if an employee works formultiple employers during a year, a sepa-rate annual wage base and withholdingthreshold generally apply in determiningeach employer’s tax liability with respectto remuneration paid to the employee.However, if during any calendar year anemployer (the “successor employer”) ac-quires substantially all of the propertyused in a trade or business of anotheremployer (the “predecessor employer”)then, for purposes of the annual wagebase, any remuneration with respect toemployment paid to such individual bythe predecessor employer during such cal-endar year and prior to the acquisition isconsidered as having been paid by the suc-cessor employer. See sections 3121(a)(1),3231(e)(2)(C), and 3306(b)(1).

If a person (payor) pays wages or com-pensation to employees who are employedby one or more employers, the Secretaryis authorized, in accordance with regula-tions prescribed by the Secretary undersection 3504, to designate such payor toperform acts required of employers underthe Code. Section 3504 further providesthat, except as otherwise prescribed by theSecretary, all provisions of law (includingpenalties) applicable with respect to anemployer are applicable to the payor sodesignated, but each employer for whomthe payor acts remains subject to the pro-visions of the law (including penalties)applicable to the employer. Consequently,both an employer and the payor desig-nated in accordance with regulations un-der section 3504 are liable for the federalemployment taxes on wages or compen-sation paid by the payor. Section31.3504–2 of the regulations provides cir-cumstances under which a payor is desig-nated to perform the acts required of anemployer and is liable for federal employ-ment taxes with respect to wages or com-pensation paid by the payor to individualsperforming services for the payor’s clientpursuant to a service agreement betweenthe payor and the client, as definedtherein. Consistent with section 3504,§ 31.3504–2 provides that the client re-mains liable for the federal employment

1In such case, remuneration received in any calendar year from each employer up to the amount of the applicable annual wage base constitutes wages and is subject to the OASDI portionof FICA tax and the equivalent portion of tier 1 RRTA tax. However, under section 6413(c), the employee may be entitled to a special credit or refund of a portion of the employee taxdeducted from wages received during the calendar year. Thus, an employee is subject to OASDI or RRTA tax only with respect to remuneration up to the applicable wage base for a year,regardless of whether the employee works for only one employer or for more than one employer during the year. See § 31.6413(c)–1.

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taxes on wages paid by the payor to em-ployees of the client.

In addition to an employer’s federalemployment tax obligations, various taxcredits are available to employers basedon the amount of wages and federal em-ployment taxes paid by the employer. Forexample, the amount of an employer’swork opportunity credit is based on a por-tion of FUTA wages paid by the employerto employees who are members of certainspecified groups. See section 51(c).

Certain reporting requirements relatingto tips apply to large food or beverageestablishments. In the case of such anestablishment, an employer is generallyrequired to report certain information re-lating to receipts and tips to the IRS eachcalendar year. Additionally, the employermust also provide employees with writtenstatements showing certain informationfor each calendar year, including theamount of tips allocated to the employeefor the year. See section 6053(c).

Professional Employer Organizations

A professional employer organization(PEO), sometimes referred to as an em-ployee leasing company, is an entity thatenters into an agreement with a client toperform some or all of the federal employ-ment tax withholding, reporting, and pay-ment functions related to workers per-forming services for the client. A PEOalso may manage human resources, em-ployee benefits, workers compensationclaims, and unemployment insuranceclaims for the client. The terms of a PEOarrangement typically provide that thePEO is the employer or “co-employer” ofthe workers and is responsible for payingthe workers and for the related federalemployment tax compliance. Under thisarrangement, the PEO remits the wages tothe workers and typically files, under itsname and EIN, Forms 940 and 941 and,where applicable, Form CT-1 to report thewages or compensation and employmenttaxes it paid. Additionally, the PEO filesForms W–2 and Form W–3 with the SSAand furnishes a Form W–2 to each worker.

The client typically pays the PEO a feebased on payroll costs plus an additionalamount. In most cases, however, theworkers working in the client’s businessare the employees of the client under the

common law rules, and the client is le-gally responsible for federal employmenttax compliance, even though the PEO mayalso be legally responsible for federal em-ployment tax compliance under§ 31.3504–2.

The ABLE Act of 2014

The ABLE Act requires the IRS toestablish a voluntary certification programfor PEOs. Section 7705(a) defines aCPEO as a person that applies to the Sec-retary of the Treasury (Secretary) to betreated as a CPEO for purposes of section3511 and has been certified by the Secre-tary as meeting certain requirements.Those requirements are described in thetemporary regulations under section 7705published in the Rules and Regulationsportion of this issue of the Internal Rev-enue Bulletin.

Under sections 3511(a)(1) and (c)(1),for purposes of federal employment taxesand other obligations under the federalemployment tax rules, a CPEO is gener-ally treated as the employer of any indi-vidual performing services for a customerof the CPEO and covered by a contractdescribed in section 7705(e)(2) betweenthe CPEO and the customer (CPEO con-tract), but only with respect to remunera-tion remitted to the individual by theCPEO. A contract meets the requirementsof section 7705(e)(2) with respect to anindividual performing services for thecustomer and, therefore, is a CPEO con-tract if the contract is in writing and pro-vides that the CPEO will assume respon-sibility, without regard to the receipt oradequacy of payment from the customer,for: (1) payment of wages to the individ-ual; (2) reporting, withholding, and pay-ment of any federal employment taxeswith respect to the individual’s wages;and (3) any employee benefits that thecontract may require the CPEO to provideto the individual. The CPEO must alsoassume responsibility in a CPEO contractfor recruiting, hiring, and firing the indi-vidual (in addition to the customer’s re-sponsibility in that regard) and for main-taining employee records relating to theindividual. Finally, the CPEO must agreein a CPEO contract to be treated as aCPEO for federal employment tax pur-poses with respect to the individual.

With respect to an individual coveredby a CPEO contract who performs ser-vices for a customer at a work site meet-ing the requirements of section 7705(e)(3)(a work site employee), section 3511(a)(1)specifies that no person other than theCPEO is treated as the employer for fed-eral employment tax purposes with re-spect to remuneration remitted by theCPEO to such individual. A work sitemeets the requirements of section7705(e)(3) with respect to an individual ifat least 85 percent of the individuals per-forming services for the customer at thework site where the individual performsservices are subject to one or more CPEOcontracts with the CPEO. For this pur-pose, individuals who are excluded em-ployees within the meaning of section414(q)(5) (such as newly hired or part-time employees) are not taken into ac-count.

Sections 3511(a)(2) and (c)(2) providethat the exceptions, exclusions, defini-tions, and other rules that are based ontype of employer and that would apply ifthe CPEO were not treated as the em-ployer under sections 3511(a)(1) or (c)(1)of the provision continue to apply. Thus,for example, if services performed in theemploy of a customer that is a tax-exemptorganization would be excluded from em-ployment for FUTA purposes, the fact thata CPEO is treated as the employer forfederal employment tax purposes does notaffect the application of the exclusion.

On entering into a CPEO contract witha customer with respect to a work siteemployee, section 3511(b) provides that aCPEO is treated as a successor employerand the customer is treated as a predeces-sor employer during the term of the CPEOcontract. On termination of a CPEO con-tract with respect to a work site employee,the customer is treated as a successor em-ployer and the CPEO is treated as a pre-decessor employer.

For purposes of various tax creditsenumerated in section 3511(d) underwhich the amount of the credit is deter-mined by reference to the amount of fed-eral employment taxes or the amount ofwages subject to federal employmenttaxes, the credit with respect to a work siteemployee performing services for a cus-tomer applies to the customer, not to theCPEO. Consequently, in determining the

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amount of the credit, the customer, andnot the CPEO, is to take into accountfederal employment taxes and wages paidby the CPEO with respect to the work siteemployee and for which the CPEO re-ceives payment from the customer. TheCPEO is required to furnish the customerand the Secretary with any informationnecessary for the customer to claim thecredit.

The CPEO provisions do not apply inthe case of a customer which bears a re-lationship to a CPEO described in section267(b) (relating to transactions betweenrelated taxpayers) or section 707(b) (relat-ing to transactions between a partner andpartnership). In the application of suchsections, rules based on more than 50 per-cent ownership are applied by substituting10 percent for 50 percent. See section3511(e).

A CPEO has no federal employmenttax liability under section 3511(a) or (c)with respect to remuneration paid by theCPEO to an individual that constitutes netearnings from self-employment to the in-dividual. Specifically, section 3511(f) pro-vides that an individual with net earningsfrom self-employment derived from aCPEO customer’s trade or business, in-cluding a partner of a customer that is apartnership, is not a work site employeefor federal employment tax purposes withrespect to remuneration paid by a CPEO.In addition, section 3511(c) provides that,for purposes of its federal employment taxliability, a CPEO is not treated as theemployer of any individual covered by aCPEO contract and described in section3511(f) with respect to remuneration paidby the CPEO to the individual. Together,these two provisions relieve the CPEO ofany federal employment tax liability un-der section 3511(a) or (c) with respect tosuch self-employed individuals.

Under section 3511(g), the Secretary isdirected to develop such reporting andrecordkeeping rules, regulations, and pro-cedures as the Secretary determines nec-essary or appropriate to ensure compli-ance with the applicable federalemployment tax provisions by CPEOs.Such rules are to address: (1) notificationof the Secretary in the case of the com-mencement or termination of a servicecontract with a customer and the EIN ofthe customer; (2) information the Secre-

tary determines is necessary for the cus-tomer to claim specified credits and themanner in which the information is to beprovided; and (3) other information theSecretary determines is essential to pro-mote compliance with respect to specifiedcredits and FUTA credits under section3302. Such rules are to be designed in amanner that streamlines, to the extent pos-sible, the application of the requirementsof sections 3511 and 7705, the exchangeof information between a CPEO and itscustomers, and the reporting and record-keeping obligations of the CPEO. Simi-larly, under section 3511(h), the Secretaryis directed to prescribe such regulations asmay be necessary or appropriate to carryout the purposes of section 3511.

In addition to adding new sections3511 and 7705 to the Code, the ABLE Actmade conforming amendments to sections3302, 3303(a), 6053(c), 6652, and 7528relating to obligations, requirements, andpenalties applicable to a CPEO. If aCPEO, or a customer of a CPEO, makes acontribution to a state’s unemploymentfund with respect to wages paid to a worksite employee, the CPEO is eligible for thecredits available under section 3302 withrespect to such contribution. See section3302(h). Similarly, under section3303(a)(4), a CPEO is allowed an addi-tional credit under section 3302(b) withrespect to any reduced rate of contribu-tions permitted by a state law if the Sec-retary of Labor finds that under such lawthe CPEO is permitted to collect and remitcontributions during the taxable year tothe state unemployment fund with respectto a work site employee. The TreasuryDepartment and the IRS recognize thatsection 3302(h) and section 3303(a)(4)apply exclusively with respect to wagespaid to work site employees and requestcomments on the application of the re-spective credits with respect to wages paidto individuals covered by a CPEO con-tract who are not work site employees.

For purposes of reporting requirementsrelating to large food or beverage estab-lishments, section 6053(c)(8) providesthat, if a CPEO is treated as the employerof a work site employee under section3511, the customer for whom the worksite employee performs services is the em-ployer for purposes of the applicable re-porting requirements. However, the

CPEO is required to furnish the customerand the Secretary with any informationthe Secretary prescribes as necessary tocomplete the required reporting.

Section 6652 provides for certain pen-alties for failure to file certain informationreturns, registration statements, and simi-lar reports. The ABLE Act provided a newpenalty in section 6652(n) specifically forfailures to timely make a complete reportrequired under sections 3511, 6053(c)(8),or 7705. In the case of such a failure,section 6652(n) imposes a penalty to bepaid (on notice and demand by the Secre-tary and in the same manner as tax) by theCPEO in an amount equal to $50 for eachreport with respect to which there wassuch a failure. In the case of any failuredue to negligence or intentional disregard,an amount equal to $100 for each reportshall be paid.

Finally, section 7528(b)(4) providesthat the fee charged in connection with theCPEO program shall be an annual fee notto exceed $1,000 per year per applicant.


1. Applicable Definitions

Section 7705 provides numerous statu-tory definitions related to the operation ofsection 3511. The proposed regulationsincorporate these statutory definitions andclarify the following terms: customer,covered employee, work site employee,work site, and self-employed individual.

The proposed regulations define a“customer” as any person who enters intoa CPEO contract (that is, a contract thatmeets the requirements of section7705(e)(2), as described in the Back-ground section of this preamble) with aCPEO. A provider of employment-relatedservices that uses its own EIN for filingfederal employment tax returns on behalfof its clients (or who used its own EINimmediately prior to entering into a CPEOcontract with the CPEO) is specificallyexcluded from being a customer of aCPEO for purposes of section 3511, evenif such provider has entered into a CPEOcontract with the CPEO and would, but

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for this exclusion, be a customer of theCPEO.2

With respect to a customer, a “coveredemployee” is any individual (other than aself-employed individual, as describedsubsequently in this section of the pream-ble) who is covered by a CPEO contractwith that customer. Consistent with sec-tion 7705(e), the proposed regulations de-fine the term “work site employee” as acovered employee who performs servicesfor a customer of a CPEO at a “work site”where at least 85 percent of the individu-als performing services are subject to oneor more CPEO contracts between theCPEO and the customer.

The proposed regulations generally de-fine “work site” as a physical location atwhich an individual regularly performsservices for a customer of a CPEO. Ifthere is no such location, the work site isthe location from which the customer as-signs work to the individual. Thus, forexample, the “work site” for a technicianwho performs assignments at various orchanging locations is the location fromwhich the technician is dispatched on eachparticular assignment. The work site maynot be the individual’s residence or a tele-work site unless the customer requires theindividual to work at that site. In applyingthe term “work site,” contiguous locationsare treated as a single physical locationand thus a single work site, and noncon-tiguous locations that are not reasonablyproximate are treated as separate physicallocations and thus separate work sites.However, the CPEO may treat noncontig-uous locations that are reasonably proxi-mate as a single physical location and thusa single work site. Any two work sites thatare separated by 35 or more miles or thatoperate in a different industry or indus-tries will not be treated as reasonablyproximate. The Treasury Department andthe IRS recognize that, under certain cir-cumstances, the physical location at whichan individual regularly performs servicesfor a customer may be difficult to ascer-tain. Accordingly, comments are re-quested on the definition of work site asset forth in § 301.7705–1(b)(16) and anyadditional clarifications that would facili-

tate a determination of an individual’swork site.

The proposed regulations also providethat a covered employee will be considereda work site employee for the entirety of acalendar quarter if he or she qualifies as awork site employee at any time during thatquarter. Consequently, for any calendarquarter, a covered employee is either a worksite employee or not a work site employeefor the entire quarter and cannot be a worksite employee for part of the quarter and anon-work site employee for the other part.On the other hand, a covered employee canbe a work site employee for one or morecalendar quarters of the year and a non-worksite employee for other calendar quartersduring the same year.

The proposed regulations provide thatthe determination of whether a coveredemployee is a work site employee is madeseparately with regard to each work site atwhich the covered employee regularlyprovides services and for each customerfor which the covered employee is provid-ing services. If, during the same calendarquarter, a covered employee regularlyprovides services at more than one worksite for a single customer or more than onecustomer of a particular CPEO, that em-ployee may be counted among the cov-ered employees at each of those sites. Inaccordance with section 7705(e)(3), theproposed regulations provide that, in de-termining whether the 85 percent thresh-old is met, individuals who are excludedemployees within the meaning of section414(q)(5) (such as newly hired or part-time employees) are not taken into ac-count as either covered employees or in-dividuals performing services, althoughsuch individuals may otherwise be cov-ered employees and work site employeesunder the proposed regulations.

Finally, the proposed regulations alsoclarify that, in determining whether atleast 85 percent of the individuals per-forming services are subject to one ormore CPEO contracts between the CPEOand the customer, a self-employed indi-vidual who would be a covered employeebut for the exclusion of self-employed in-dividuals from the definition of covered

employee (as described in this section ofthe preamble) is taken into account. Forthis and other purposes, the proposed reg-ulations define a “self-employed individ-ual” as an individual with net earningsfrom self-employment (as defined in sec-tion 1402(a) and without regard to theexceptions thereunder) derived from pro-viding services covered by a CPEO con-tract, whether such net earnings are de-rived from providing services as a non-employee to a customer of a CPEO, fromthe individual’s own trade or business as asole proprietor customer of the CPEO, oras a partner in a partnership that is acustomer of the CPEO, but only with re-gard to such net earnings. Accordingly, aself-employed individual, whether an in-dependent contractor to the customer, asole proprietor customer of the CPEO, ora partner in a partnership customer of theCPEO, is not considered to be a work siteemployee under section 3511(f) with re-gard to such earnings. However, in thelimited case in which such an individualalso is paid wages by a CPEO under aCPEO contract with the customer, the in-dividual may nevertheless be a work siteemployee with respect to such wages. Inall cases, the self-employed individualcovered by a CPEO contract is appropri-ately counted in determining whether the85 percent threshold is met.

2. CPEO as Employer of CoveredEmployees

Consistent with sections 3511(a)(1)and (c)(1), the proposed regulations pro-vide that, for purposes of federal employ-ment taxes and other obligations under thefederal employment tax rules, a CPEO istreated as the employer of any coveredemployee (whether or not a work site em-ployee), but only with respect to remuner-ation remitted to the individual by theCPEO. Consistent with section 3511(a)(1),the proposed regulations also provide that,with respect to a covered employee who is awork site employee, no person other thanthe CPEO will be treated as the employer ofthe work site employee for federal employ-ment tax purposes with respect to remuner-ation remitted by the CPEO to such work

2References in this preamble and the proposed regulations to “customers” are limited to those persons who have entered into a CPEO contract and any rules applicable to a customer applyonly with respect to that contract. In contrast, the term “client” is used more broadly to include persons receiving services from a provider of employment-related services (that may or maynot be a CPEO) in instances when those services are not covered by a CPEO contract.

Bulletin No. 2016–21 May 23, 2016997

site employee. In contrast, in the case of acovered employee who is not a work siteemployee, the proposed regulations providethat a person other than the CPEO is alsotreated as an employer of the employee forpurposes of federal employment taxes im-posed on remuneration remitted by theCPEO to the employee if such person isdetermined to be an employer of the em-ployee without regard to the application ofsection 3511.

3. Application of Federal EmploymentTax Exemptions, Exclusions, Definitions,and Other Rules

Under sections 3511(a)(2) and (c)(2),the exceptions, exclusions, definitions,and other rules that are based on the typeof employer and that would apply if theCPEO were not treated as the employerunder section 3511 continue to apply withrespect to remuneration remitted by theCPEO. Thus, sections 3511(a)(2) and(c)(2) necessitate a determination ofwhether the CPEO, the customer, or athird party is the employer of a coveredemployee without regard to section 3511for purposes of applying federal employ-ment tax exemptions, exclusions, defini-tions, and other rules. Under the Code, theexistence of an employer-employee rela-tionship is generally determined by apply-ing the common law rules to the particularfacts and circumstances of each case.While the terms of a PEO arrangementtypically provide that the PEO is the em-ployer (or “co-employer”) of the employ-ees and is responsible for paying the em-ployees and for the related federalemployment tax compliance, in most in-stances the customer is actually the com-mon law employer of such employees.

To avoid the need to make a commonlaw employment determination for pur-poses of sections 3511(a)(2) and (c)(2),the proposed regulations provide that, forpurposes of federal employment taxes, theexemptions, exclusions, definitions, andother rules that are based on type of em-ployer and that apply to remuneration re-mitted by a CPEO to a covered employeeare presumed to be based on the customerfor whom the covered employee providesservices. Additionally, if a covered em-ployee provides services for more thanone customer of the CPEO during the

calendar year, the presumption appliesseparately to remuneration remitted by theCPEO to the covered employee with re-spect to each such customer. This pre-sumption in the proposed regulations gen-erally eliminates the need to make adetermination as to which person is theemployer (in the absence of section 3511)for purposes of the exceptions, exclusions,definitions, and other rules that are basedon type of employer.

The proposed regulations also provide,however, that the presumption may berebutted if the Commissioner determines,or the CPEO demonstrates by clear andconvincing evidence, that the relationshipbetween the customer and the coveredemployee is not the legal relationship ofemployer and employee. If the presump-tion is rebutted, the exemptions, exclu-sions, definitions, and other rules that arebased on type of employer and which ap-ply to remuneration remitted by a CPEOto a covered employee will be based onthe person determined to be the employerof the covered employee without regard tothe application of section 3511. The pre-sumption can be rebutted by a demonstra-tion that either the CPEO or a third partyother than the customer is actually theemployer for federal employment tax pur-poses and, therefore, the proper party onwhich to base the exceptions, exclusions,definitions, and other rules. In any event,the presumption does not create any infer-ence with respect to who is an employeror employee or whether an employmentrelationship exists for other federal taxpurposes or any other provision of law.

4. Annual Wage Base and WithholdingThreshold

Under sections 3511(a) and (c), aCPEO is treated as the employer of anycovered employee with respect to remu-neration remitted to the individual by theCPEO. Thus, pursuant to section 3511, aCPEO has an employment relationshipwith the covered employee of a customerduring the term of the CPEO contract withthe customer that is separate from andindependent of any employment relation-ship the customer may have with the em-ployee. Consequently, during the calendaryear in which a CPEO enters into a CPEOcontract with a customer with respect to a

covered employee, the covered employeemay receive remuneration from more thanone employer.

The proposed regulations provide that,except as provided with respect to succes-sor and predecessor employers describedin section 5 of this preamble, remunera-tion received by a covered employee froma CPEO for performing services for a cus-tomer of the CPEO within any calendaryear is subject to a separate annual wagebase and withholding threshold that areeach computed with respect to such remu-neration, without regard to any remuner-ation received by the covered employeeduring the calendar year from any otheremployer (including, if applicable, remu-neration received directly from the cus-tomer receiving services from the em-ployee). Thus, upon entering into a CPEOcontract with a customer with respect to acovered employee, the CPEO starts a newannual wage base and withholding thresh-old with respect to the covered employee(unless the CPEO is treated as a successoror predecessor employer, as described insection 5 of this preamble). Additionally,any remuneration paid by the customerdirectly to a covered employee during theterm of a CPEO contract is not paid by theCPEO and, consequently, is not includedin the CPEO’s annual wage base andwithholding threshold with respect to thecovered employee.

The proposed regulations also providethat if, during a calendar year, a coveredemployee receives remuneration from aCPEO for services performed by the cov-ered employee for more than one cus-tomer of the CPEO, the annual wage baseand withholding threshold do not apply tothe aggregate remuneration received bythe covered employee from the CPEO forservices performed for all such customers.Rather, the annual wage base and with-holding threshold apply separately to theremuneration received by the covered em-ployee from the CPEO with respect toservices performed for each customer.The maintenance of a separate annualwage base and withholding threshold withrespect to each customer for which a cov-ered employee performs services during acalendar year recognizes both the CPEO’sstatus as an employer of the covered em-ployee under section 3511 and theCPEO’s responsibilities under a CPEO

May 23, 2016 Bulletin No. 2016–21998

contract with respect to services per-formed by a covered employee for eachindividual customer. Additionally, a sep-arate annual wage base and withholdingthreshold with respect to each customerfor which a covered employee performsservices is needed for purposes of apply-ing some of the exemptions, exclusions,definitions, and other rules discussed insection 3 of this preamble and the treat-ment of some of the credits discussed insection 6 of this preamble. Thus, if a sin-gle employee receives remuneration underCPEO contracts with more than one cus-tomer, the CPEO must maintain a separateannual wage base and withholding thresh-old for the employee with respect to eachcustomer.

5. Successor Employer Status

Consistent with section 3511(b), theproposed regulations also provide that, forpurposes of computing the annual wagebase, a CPEO and its customer are treatedas: (1) a successor and predecessor em-ployer, respectively, upon entering into aCPEO contract with respect to a work siteemployee who is performing services forthe customer; and (2) a predecessor andsuccessor employer, respectively, upontermination of the CPEO contract betweenthe CPEO and the customer with respectto the work site employee. Consistent withthe quarterly work site employee determi-nation discussed in section 1 of this pre-amble, the determination of whether anemployee is a work site employee for thispurpose is made during the quarter inwhich the CPEO enters into (or termi-nates) the CPEO contract with respect tothe employee. That is, an employee willbe considered a work site employee forthe entirety of a calendar quarter if he orshe qualifies as a work site employee atany time during that quarter. Accordingly,a CPEO is a successor employer (or pre-decessor employer) with regard to anycovered employee who is a work site em-ployee at any point during the quarter inwhich the CPEO entered into (or termi-nated) the CPEO contract with respect tothe employee. On the other hand, as alsonoted in section 1 of this preamble, acovered employee can be a work site em-ployee for one or more calendar quartersof the year and a non-work site employee

for other calendar quarters during thesame year. Accordingly, the proposed reg-ulations provide that a CPEO entering intoa CPEO contract with a customer withrespect to a covered employee who is nota work site employee at any time duringthat calendar quarter will not be treated asa successor employer regardless ofwhether, during the term of the CPEOcontract, the covered employee subse-quently becomes a work site employee.Similarly, a CPEO terminating a CPEOcontract with a customer with respect to acovered employee who is not a work siteemployee at any time during that calendarquarter will not be treated as a predecessoremployer regardless of whether, duringthe term of the CPEO contract, the cov-ered employee had previously been awork site employee. The quarterly deter-mination of work site employee status isutilized for purposes of the successor em-ployer and predecessor employer determi-nations (as well as for other purposes un-der the proposed regulations) in order tohave a consistent quarterly work site em-ployee determination for all purposes andtherefore assist with administrability.

6. Treatment of Credits

Section 3511(d) governs the treatmentof various tax credits under which theamount of the credit is determined by ref-erence to the amount of wages or federalemployment taxes. Section 3511(d)(2)specifies these credits as the credits undersection 41 (credit for increasing researchactivity), section 45A (Indian employ-ment credit), section 45B (credit for por-tion of employer social security taxes paidwith respect to employee cash tips), sec-tion 45C (clinical testing expenses for cer-tain drugs for rare diseases or conditions),section 45R (employee health insuranceexpenses of small employers), section 51(work opportunity credit), section 1396(empowerment zone employment credit),and any other section as provided by theSecretary. Consistent with section3511(d), the proposed regulations providethat any specified credit with respect to awork site employee performing servicesfor a customer applies to the customer, notto the CPEO. Consequently, in determin-ing the amount of the credit, the customer,and not the CPEO, takes into account

wages and federal employment taxes paidby the CPEO with respect to the work siteemployee and for which the CPEO re-ceives payment from the customer. Asnoted in the discussion of the annual wagebase and withholding threshold in section4 of this preamble, a CPEO must maintaina separate annual wage base and with-holding threshold with respect to eachcustomer for which a covered employeeperforms services during a calendar year.Consequently, with respect to a work siteemployee performing services for morethan one customer of a CPEO during acalendar year, each customer for whichthe employee performs services takes intoaccount wages and federal employmenttaxes paid by the CPEO only with respectto services performed by the work siteemployee for that customer in determin-ing the treatment of credits by that cus-tomer. The proposed regulations also pro-vide that, consistent with section3511(d)(2)(H), the Commissioner mayspecify other credits subject to the treat-ment provided for under section 3511(d).

The proposed regulations do not spec-ify any other credits, but the TreasuryDepartment and the IRS request com-ments on whether other credits should bespecified in these regulations or in otherguidance. Additionally, the Treasury De-partment and the IRS recognize that theapplication of the specified tax credits tothe customer under section 3511(d) ap-plies exclusively with respect to work siteemployees. Accordingly, comments arealso requested on the treatment of taxcredits with respect to covered employeeswho are not work site employees.

7. Special Rules Applicable to RelatedCustomers, Self-Employed Individuals,and Other Circumstances

Consistent with section 3511(e), theproposed regulations do not apply in thecase of a customer that is related to theCPEO. For these purposes, the proposedregulations provide that a customer is re-lated to a CPEO if that customer bears arelationship to a CPEO described in sec-tion 267(b) or section 707(b), except that“10 percent” will be substituted for “50percent” wherever the latter term appearsin those sections. For administrative pur-poses such as verifying correct CPEO em-

Bulletin No. 2016–21 May 23, 2016999

ployment tax reporting and determiningwhether successor employer rules apply,the IRS must know when a CPEO hasentered into a CPEO contract with a cus-tomer. For this reason, the proposed reg-ulations also exclude from section 3511any customer that has commenced a ser-vice contract with a CPEO if the com-mencement of such service contract hasnot been reported to the IRS in accordancewith the requirements described in§ 31.3511–1(g)(3)(i) of the proposed reg-ulations (discussed in section 8 of thispreamble).

Consistent with section 3511(f), whichprovides that a self-employed individualis not a work site employee with respect toremuneration paid by a CPEO, and withsection 3511(c), which provides that aCPEO is not treated as an employer of aself-employed individual, the proposedregulations provide that section 3511 doesnot apply to any self-employed individual.Nevertheless, as discussed in section 1 ofthis preamble, a self-employed individualmay be counted as an employee coveredby a CPEO contract for purposes of de-termining whether the 85 percent thresh-old for qualification of other covered em-ployees as work site employees is met, asdescribed in section 1 of this preamble.

Finally, the proposed regulations pro-vide that section 3511 does not apply toany CPEO contract in which a CPEO en-ters while its certification has been sus-pended by the IRS or to a CPEO whosecertification has been revoked or volun-tarily terminated.

8. Reporting and RecordkeepingRequirements

Consistent with section 3511(g), theproposed regulations describe various re-cordkeeping and reporting requirementsapplicable to CPEOs that are designed toensure compliance with the applicablefederal employment tax provisions. Sig-nificantly, the proposed regulations pro-vide that a CPEO that is treated as anemployer of a covered employee pursuantto section 3511 must meet all reportingand recordkeeping requirements describedin subtitle F of the Code that are applica-ble to employers in a manner consistentwith such treatment. Additionally, a

CPEO must file the returns required of allemployers by subtitle F.

Moreover, a CPEO must file Forms940 and 941, and all required accompany-ing schedules, on magnetic media unlessthe CPEO is provided a waiver by theCommissioner. The proposed regulationsdefine magnetic media as electronic filing,as well as other media specifically permit-ted under the applicable regulations, rev-enue procedures, publications, forms, in-structions, or other guidance.

a. Reporting to the IRS by CPEOs

Consistent with section 3511(g)(1), theproposed regulations provide that a CPEOmust report information relating to thecommencement or termination of anyCPEO contract with a customer and thename and EIN of such customer.

The proposed regulations also providethat, with any Form 940 or Form 941 thata CPEO files, the CPEO must attach theapplicable Schedule R (or any successorform) containing such information as theCommissioner may require about each ofits customers under a CPEO contract andany clients under a service agreement de-scribed in § 31.3504–2(b)(2). As notedpreviously, a CPEO is also required to fileForms 940 and 941, including all requiredschedules, on magnetic media as a condi-tion of certification.

So that the IRS can better reconcile thetotal amounts of wages and taxes reportedon Forms 940 and 941 with the amountsof wages and taxes reported on the at-tached Schedule R, the proposed regula-tions provide that, in addition to providinginformation about each customer under aCPEO contract, a CPEO must also includesuch information as the Commissionermay require about each of its clients undera service agreement described in§ 31.3504–2(b)(2) that is not a CPEOcontract. To assist the IRS in verifyingwhich entities reported on the Schedule Rare customers under a CPEO contract, andwhich are clients under a service agree-ment described in § 31.3504–2(b)(2) thatis not a CPEO contract, the proposed reg-ulations require that a CPEO must alsoreport information relating to the com-mencement or termination of a serviceagreement described in § 31.3504–2(b)(2)

with a client, and the name and EIN ofeach such client.

In addition, the proposed regulationsspecify that a CPEO must provide peri-odic verification to the IRS that it contin-ues to meet the CPEO certification re-quirements of the temporary regulations,as described in § 301.7705–2T(j), and re-port any change that materially affects thecontinuing accuracy of any agreement orinformation that was previously made orprovided by the CPEO to the IRS, asdescribed in § 301.7705–2T(k). The timeand manner of this ongoing periodic ver-ification will be specified in further guid-ance. Finally, the proposed regulations re-quire that a CPEO provide: (1) a copy ofits audited financial statements and anopinion of a certified public accountantregarding such financial statements, as de-scribed in § 301.7705–2T(e)(1); (2) thequarterly statements, assertions, and attes-tations regarding those assertions de-scribed in § 301.7705–2T(f); (3) any in-formation that the IRS specifies in furtherguidance is necessary to promote compli-ance with respect to the credits describedin § 31.3511–1(e)(2) of the proposed reg-ulations and section 3302; and (4) anyother information the Commissioner mayprescribe in further guidance.

b. Reporting to customers by CPEOs

The proposed regulations require aCPEO to report certain information to itscustomers. Consistent with sections3511(g)(2) and (3), a CPEO must provideeach of its customers with the informationnecessary for the customer to claim thespecified credits for which the amount ofthe credit is determined by reference tothe amount of wages or federal employ-ment taxes. The proposed regulations pro-vide that a CPEO must also notify thecustomer if its CPEO contract has beentransferred to another person (or if anotherperson will report, withhold, or pay, undersuch other person’s EIN, any applicablefederal employment taxes with respect tothe wages of any individuals covered byits CPEO contract), and provide the cus-tomer with the name and EIN of suchother person. In addition, a CPEO mustalso notify each of its current customers ofany suspension or revocation of theCPEO’s certification. Finally, if any cov-

May 23, 2016 Bulletin No. 2016–211000

ered employees are not or cease to bework site employees with respect to acalendar quarter because they performservices at a location at which the 85percent threshold described in section 1 ofthis preamble is no longer met, the pro-posed regulations provide that the CPEOmust notify the customer that it may beliable for federal employment taxes im-posed on remuneration remitted by theCPEO to such covered employees.

c. Information and agreements in anycontract or agreement between a CPEOand client

The proposed regulations provide thatany CPEO contract with a customer must:(1) contain the name and EIN of theCPEO reporting, withholding, and payingany applicable federal employment taxeswith respect to any remuneration paid toindividuals covered by the CPEO contractor service agreement; (2) require theCPEO to provide the customer with all ofthe notices and information described insection 8.b of this preamble; (3) describethe information that the CPEO will pro-vide which is necessary for the customerto claim credits; and (4) specify that theCPEO must notify the customer that thecustomer may also be liable for federalemployment taxes on remuneration remit-ted by the CPEO to covered employees ifthe sites at which they perform services donot (or ever cease to) meet the 85 percentthreshold described in § 301.7705–1(b)(18). The proposed regulations alsoprovide that if a service agreement de-scribed in § 31.3504–2(b)(2) is not aCPEO contract (and thus the employeescovered by that service agreement are notcovered employees), or if section 3511does not otherwise apply to a contract asdescribed in section 7 of this preamble,the service agreement or contract shouldbe accompanied by a notification to theclient explaining that the service agree-ment or contract is not covered by section3511 and does not alter the client’s liabil-ity for federal employment taxes on remu-neration remitted by the CPEO to the in-dividuals covered by the serviceagreement or contract.

9. Penalties Applicable to CPEOs

Although the ABLE Act provided thenew penalty under section 6652(n) forfailures to timely make required reportsunder sections 3511, 6053(c)(8), and7705, the Treasury Department and theIRS note that many of the reports requiredunder sections 3511 and 7705 are alsosubject to existing penalties and additionsto tax. For example, because CPEOs aretreated as employers of covered employ-ees, CPEOs must meet the reporting re-quirements applicable to employers, in-cluding the filing of quarterly Forms 941.A CPEO that fails to file a Form 941 issubject to the addition to tax under section6651(a)(1). Accordingly, the proposedregulations provide that a CPEO that istreated as an employer of a covered em-ployee under section 3511 and that is re-quired to meet the reporting requirementsof an employer is subject to the samepenalties and additions to tax as an em-ployer with respect to such reporting re-quirements, including but not limited topenalties and additions to tax under sec-tions 6651, 6656, 6672, 6721, 6722, and6723.

The proposed regulations further clar-ify that the section 6652(n) penalty willapply to reports required under section3511. The proposed regulations providethat a CPEO is subject to penalty undersection 6652(n) for any failure to attachthe applicable Schedule R (or any succes-sor form) to Forms 940 or 941. The pro-posed regulations also provide that theCPEO is subject to penalty under section6723 for any failure (including multiplefailures within a single document) to in-clude the EIN of each customer on Sched-ule R.

Finally, the proposed regulations clar-ify that, because the requirement to fileForms 940 and 941 on magnetic media isa condition of certification, any failure tofile those forms, along with all requiredschedules, on magnetic media does notconstitute a failure to file for the purposesof the section 6651(a)(1) addition to tax orfailure to make a report for the purposesof the penalty under section 6652(n). Theconsequence of any failure to file theseforms and associated schedules on mag-netic media is the potential suspension orrevocation of certification as a CPEO.

Proposed Effective/Applicability Dates

These regulations are proposed to be ef-fective on and after the date these rules arepublished in the Internal Revenue Bulletinas final or temporary regulations. Taxpayersmay rely on these proposed regulations be-ginning July 1, 2016, and until final or tem-porary regulations are published.

Availability of IRS Documents

IRS revenue procedures, revenue rul-ings, notices, and other guidance cited inthis document are published in the Inter-nal Revenue Bulletin (or Cumulative Bul-letin) and are available from the Superin-tendent of Documents, U.S. GovernmentPrinting Office, Washington, DC 20402,or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. It ishereby certified that the regulations willnot have a significant economic impact ona substantial number of small entities. Thecollection of information is in§§ 31.3511–1(g) and 301.7705–2T. Thecertification is based on the following:

The Treasury Department and the IRSanticipate that the organizations thatchoose to apply for this voluntary certifi-cation program are likely to be entitiesthat already have many of the systems andprocesses in place that are needed to com-ply with these regulations. For example, itis expected that CPEOs will generallymaintain annual audited financial state-ments during the normal course of theirbusiness, rather than solely as a result of§ 301.7705–2T(e). Moreover, the require-ments in §§ 301.7705–2T(e) and (f) fordemonstrating positive working capital onan annual basis and for the quarterly as-sertions regarding employment tax com-pliance build upon requirements alreadyreflected in many state PEO certificationand registration laws, thereby minimizing

Bulletin No. 2016–21 May 23, 20161001

the economic impact on those CPEO ap-plicants already subject to the similar statelaw requirements.

In addition, many of the requirementsin §§ 31.3511–1(g) and 301.7705–2T thatimpose a collection of information onCPEOs constitute one-time notificationsto the IRS, customers, or clients or noti-fications that relate to events in the lifecycle of a CPEO that are less predictableand may be infrequent – such as transfersof existing CPEO contracts, making ma-terial changes to agreements previouslyprovided to the IRS, suspension or revo-cation of the CPEO’s certification, or thereclassification of employees at a particu-lar work site as non-work site employees– and thus will have a minimal economicimpact on the CPEO. Moreover, the Trea-sury Department and the IRS expect thatCPEOs participating in this voluntary pro-gram will be able to build upon pre-existing systems and processes throughwhich they already communicate withtheir clients.

For these reasons, a Regulatory Flexi-bility Analysis under the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) is notrequired. Pursuant to section 7805(f) ofthe Code, these regulations have been sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on their impact on small busi-ness.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The Treasury Department andthe IRS request comments on all aspectsof the proposed rules. All comments willbe available at www.regulations.gov orupon request. A public hearing will bescheduled if requested in writing by anyperson that timely submits written com-ments. If a public hearing is scheduled,notice of the date, time, and place for thehearing will be published in the FederalRegister.


The principal authors of these regula-tions are Melissa Duce, Andrew Holu-beck, and Neil Shepherd of the Office ofAssociate Chief Counsel (Tax Exemptand Government Entities). However,other personnel from the Treasury Depart-ment and the IRS participated in the de-velopment of these regulations.

List of Subjects

26 CFR Part 31

Employment taxes, Income taxes, Pen-alties, Pensions, Railroad retirement,Reporting and recordkeeping require-ments, Social Security, Unemploymentcompensation.

26 CFR Part 301

Employment taxes, Estate taxes, Ex-cise taxes, Gift taxes, Income taxes,Penalties, Reporting and recordkeepingrequirements.

Proposed Amendments to theRegulations

Accordingly, 26 CFR parts 31 and 301are proposed to be amended as follows:

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOMETAX AT THE SOURCE

Paragraph 1. The authority citation forpart 31 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 31.3511–1 is also issued under

26 U.S.C. 3511(h).* * * * *Par. 2. Section 31.3511–1 is added to

subpart F to read as follows:

§ 31.3511–1 Certified professionalemployer organization.

(a) Treatment as employer—(1) Ingeneral. For purposes of the federal em-ployment taxes and other obligations im-posed under chapters 21 through 25 ofsubtitle C of the Internal Revenue Code(federal employment taxes), a certifiedprofessional employer organization(CPEO) (as defined in § 301.7705–1T(b)(1) of this chapter) is treated as the

employer of any covered employee (asdefined in § 301.7705–1(b)(5) of thischapter), but only with respect to remu-neration remitted by the CPEO to suchcovered employee.

(2) Work site employee. In the case of acovered employee who is a work site em-ployee (as defined in § 301.7705–1(b)(17)of this chapter), no person other than theCPEO is treated as the employer of thework site employee for purposes of fed-eral employment taxes imposed on remu-neration remitted by the CPEO to thework site employee.

(3) Non-work site employee. In the caseof a covered employee who is not a worksite employee, a person other than theCPEO is also treated as an employer ofthe employee for purposes of federal em-ployment taxes imposed on remunerationremitted by the CPEO to the employee ifsuch person is determined to be an em-ployer of the employee without regard tothe application of this paragraph (a) andsection 3511.

(b) Exemptions, exclusions, definitions,and other rules—(1) In general. Solelyfor purposes of federal employment taxesimposed on remuneration remitted by aCPEO to a covered employee, the appli-cation of exemptions, exclusions, defini-tions, and other rules that are based on thetype of employer is presumed to be basedon the type of employer of the customer ofthe CPEO for whom the covered em-ployee performs services. If a covered em-ployee performs services for more thanone customer of the CPEO during thecalendar year, the presumption describedin the previous sentence applies separatelyto remuneration remitted by the CPEO tothe covered employee for services per-formed with respect to each such cus-tomer.

(2) Presumption rebutted. The pre-sumption set forth in paragraph (b)(1) ofthis section may be rebutted if either theCommissioner determines, or the CPEOdemonstrates by clear and convincing ev-idence, that the relationship between thecustomer and the covered employee is notthe legal relationship of employer and em-ployee as set forth in § 31.3401(c)–1. Ifsuch a determination or demonstration ismade, then, with respect to remunerationremitted by a CPEO to a covered em-ployee, the application of exemptions, ex-

May 23, 2016 Bulletin No. 2016–211002

clusions, definitions, and other rules thatare based on the type of employer will bebased on the type of employer of the per-son determined by the Commissioner ordemonstrated by the CPEO to be the com-mon law employer of the covered em-ployee in accordance with§ 31.3401(c)–1.

(3) No inference from presumption.The presumption set forth in paragraph(b)(1) of this section does not create anyinference with respect to the determina-tion of who is an employer or employee orwhether the legal relationship of employerand employee exists for federal tax pur-poses or for purposes of any other provi-sion of law (other than for paragraph(b)(1) of this section).

(c) Annual wage limitation, contribu-tion base, and withholding threshold—(1)CPEO has separate taxable wage base,contribution base, and withholdingthreshold. For purposes of applying theannual wage limitations under sections3121(a)(1) and 3306(b)(1) (relating to theFederal Insurance Contributions Act andthe Federal Unemployment Tax Act, re-spectively), the contribution base undersection 3231(e)(2) (relating to the Rail-road Retirement Tax Act), and the with-holding threshold under section3102(f)(1) (relating to the AdditionalMedicare Tax), remuneration received bya covered employee from a CPEO forperforming services for a customer of theCPEO within any calendar year is subjectto a separate annual wage limitation, con-tribution base, and withholding thresholdthat are each computed without regard toany remuneration received by the coveredemployee during the calendar year fromany other employer (including, if applica-ble, remuneration received directly fromthe customer receiving services from theemployee). Notwithstanding the preced-ing sentence, a CPEO is treated as a suc-cessor or predecessor employer for pur-poses of the annual wage limitations andcontribution base upon entering into orterminating a CPEO contract (as definedin § 301.7705–1(b)(3) of this chapter)with respect to a work site employee, asdescribed in paragraph (d) of this section.

(2) Performance of services for morethan one customer. If, during a calendaryear, a covered employee receives remu-neration from a CPEO for services per-

formed by the covered employee for morethan one customer of the CPEO, the an-nual wage limitation, contribution base,and withholding threshold do not apply tothe aggregate remuneration received bythe covered employee from the CPEO forservices performed for all such customers.Rather, the annual wage limitation, con-tribution base, and withholding thresholdapply separately to the remuneration re-ceived by the covered employee from theCPEO with respect to services performedfor each customer.

(d) Successor employer status—(1) Ingeneral. For purposes of sections3121(a)(1), 3231(e)(2)(C), and3306(b)(1), a CPEO and its customer aretreated as—

(i) A successor and predecessor em-ployer, respectively, upon entering into aCPEO contract with respect to a work siteemployee who is performing services forthe customer; and

(ii) A predecessor and successor em-ployer, respectively, upon termination ofthe CPEO contract between the CPEO andthe customer with respect to the work siteemployee who is performing services forthe customer.

(2) Non-work site employee. A CPEOentering into a CPEO contract with a cus-tomer during a calendar quarter with re-spect to a covered employee who is not awork site employee at any time duringthat calendar quarter will not be treated asa successor employer (and the customerwill not be treated as a predecessor em-ployer) for purposes of paragraph (d)(1)(i)of this section regardless of whether, dur-ing the term of the CPEO contract, thecovered employee subsequently becomesa work site employee. Similarly, a CPEOterminating a CPEO contract with a cus-tomer during a calendar quarter with re-spect to a covered employee who is not awork site employee at any time duringthat calendar quarter will not be treated asa predecessor employer (and the customerwill not be treated as a successor em-ployer) for purposes of paragraph(d)(1)(ii) of this section regardless ofwhether, during the term of the CPEOcontract, the covered employee had previ-ously been a work site employee.

(e) Treatment of credits—(1) In gen-eral. For purposes of the credits specifiedin paragraph (e)(2) of this section—

(i) The credit with respect to a worksite employee performing services for acustomer applies to the customer, not tothe CPEO; and

(ii) In computing the credit, the cus-tomer, and not the CPEO, is to take intoaccount wages and federal employmenttaxes paid by the CPEO with respect tothe work site employee and for which theCPEO receives payment from the cus-tomer.

(2) Credits specified. A credit is spec-ified in this paragraph if such credit isallowed under—

(i) Section 41 (credit for increasing re-search activity);

(ii) Section 45A (Indian employmentcredit);

(iii) Section 45B (credit for portion ofemployer social security taxes paid withrespect to employee cash tips);

(iv) Section 45C (clinical testing ex-penses for certain drugs for rare diseasesor conditions);

(v) Section 45R (employee health in-surance expenses for small employers);

(vi) Section 51 (work opportunity cred-it);

(vii) Section 1396 (empowerment zoneemployment credit); and

(viii) Any other section specified bythe Commissioner in further guidance (asdefined in § 301.7705–1T(b)(8) of thischapter).

(f) Section not applicable to relatedcustomers, self-employed individuals, andother circumstances. This section does notapply—

(1) In the case of any customer that—(i) Has a relationship to a CPEO de-

scribed in section 267(b) (including, bycross-reference, section 267(f)) or section707(b), except that “10 percent” shall besubstituted for “50 percent” wherever itappears in such sections; or

(ii) Has commenced a CPEO contractwith the CPEO but such commencementhas not been reported to the IRS as de-scribed in paragraph (g)(3)(i) of this sec-tion; or

(2) To remuneration paid by a CPEO toany self-employed individual (as definedin § 301.7705–1(b)(14) of this chapter);

(3) To any CPEO contract that a CPEOenters into while its certification has beensuspended by the IRS; or

Bulletin No. 2016–21 May 23, 20161003

(4) To any CPEO whose certificationhas been revoked or voluntarily termi-nated.

(g) Reporting and recordkeeping—(1)Reporting and recordkeeping for employ-ers. A CPEO that is treated as an em-ployer of a covered employee pursuant toparagraph (a) of this section must meet allreporting and recordkeeping requirementsdescribed in subtitle F of the Code that areapplicable to employers in a manner con-sistent with such treatment.

(2) Reporting on magnetic media—(i)In general. A CPEO must file on magneticmedia any Form 940, “Employer’s An-nual Federal Unemployment (FUTA) TaxReturn,” and Form 941, “Employer’sQUARTERLY Federal Tax Return,” andall required accompanying schedules, aswell as such other returns, schedules, andother required forms and documents as isrequired by further guidance.

(ii) Waiver. The Commissioner maywaive the requirements of this paragraph(g)(2) in case of undue economic hard-ship. The principal factor in determininghardship will be the amount, if any, bywhich the cost of filing the return, sched-ule, or other required form or documenton magnetic media in accordance withthis paragraph (g)(2) exceeds the cost offiling on or by other media. A request fora waiver must be made in accordance withapplicable guidance. The waiver willspecify the type of filing (that is, the nameof the form or schedule) and the period towhich it applies. In addition, the waiverwill be subject to such terms and condi-tions regarding the method of filing asmay be prescribed by the Commissioner.

(iii) Magnetic media. The term mag-netic media means any magnetic mediapermitted under applicable guidance.These generally include electronic filing,as well as other media specifically permit-ted under the applicable guidance.

(3) Reporting to the IRS by CPEOs. ACPEO must report the following to theIRS in such time and manner, and includ-ing such information, as the Commis-sioner may prescribe in further guidance:

(i) The commencement or terminationof any CPEO contract (as defined in§ 301.7705–1(b)(3) of this chapter) with acustomer, or any service agreement de-scribed in § 31.3504–2(b)(2) with a client,

and the name and employer identificationnumber (EIN) of such customer or client.

(ii) With any Form 940 and Form 941that it files, all required schedules, includ-ing but not limited to the applicableSchedule R (or any successor form), con-taining such information as the Commis-sioner may require about each of its cus-tomers under a CPEO contract (as definedin § 301.7705–1(b)(3) of this chapter) andeach of its clients under a service agree-ment described in § 31.3504–2(b)(2). ACPEO must file Form 940 and Form 941,along with all required schedules, on mag-netic media, unless the CPEO is granted awaiver by the Commissioner in accor-dance with paragraph (g)(2)(ii) of this sec-tion.

(iii) A periodic verification that it con-tinues to meet the requirements of§ 301.7705–2T of this chapter, as de-scribed in § 301.7705–2T(j).

(iv) Any change that materially affectsthe continuing accuracy of any agreementor information that was previously madeor provided by the CPEO to the IRS, asdescribed in § 301.7705–2T(k) of thischapter.

(v) A copy of its audited financial state-ments and an opinion of a certified publicaccountant regarding such financial state-ments, as described in § 301.7705–2T(e)(1) of this chapter.

(vi) The quarterly statements, asser-tions, and attestations regarding those as-sertions described in § 301.7705–2T(f)(1)of this chapter.

(vii) Any information the IRS deter-mines is necessary to promote compliancewith respect to the credits described inparagraph (e)(2) of this section and sec-tion 3302.

(viii) Any other information the Com-missioner may prescribe in further guid-ance.

(4) Reporting to customers by CPEOs.A CPEO must meet the following report-ing requirements with respect to its cus-tomers in such time and manner, and in-cluding such information, as theCommissioner may prescribe in furtherguidance:

(i) Provide each of its customers withthe information necessary for the cus-tomer to claim the credits described inparagraph (e)(2) of this section.

(ii) Notify any customer if its CPEOcontract has been transferred to anotherperson (or if another person will report,withhold, or pay, under such other per-son’s EIN, any applicable federal employ-ment taxes with respect to the wages ofany individuals covered by its CPEO con-tract) and provide the customer with thename and EIN of such other person.

(iii) If the CPEO’s certification is sus-pended or revoked as described in§ 301.7705–2T(n) of this chapter, notifyeach of its current customers of such sus-pension or revocation.

(iv) If any covered employees are notor cease to be work site employees be-cause they perform services at a locationat which the 85 percent threshold de-scribed in § 301.7705–1(b)(17) of thischapter is not met, notify the customerthat it may also be liable for federal em-ployment taxes imposed on remunerationremitted by the CPEO to such coveredemployees, as described in paragraph(a)(3) of this section.

(5) Information and agreements in anycontract or agreement between a CPEOand a customer or client. Any CPEO con-tract (as defined in § 301.7705–1(b)(3) ofthis chapter) between a CPEO and a cus-tomer or service agreement described in§ 31.3504–2(b)(2) between a CPEO and aclient must—

(i) In the case of a contract that is aCPEO contract,—

(A) Contain the name and EIN of theCPEO reporting, withholding, and payingany applicable federal employment taxeswith respect to any remuneration paid toindividuals covered by the contract oragreement;

(B) Require the CPEO to provide to thecustomer the notices and information re-quired by paragraph (g)(4) of this section;

(C) Describe the information that theCPEO will provide that is necessary forthe customer to claim the credits specifiedin paragraph (e)(2) of this section; and

(D) Require the CPEO to notify thecustomer that the customer may also beliable for federal employment taxes onremuneration remitted by the CPEO tocovered employees if the work sites atwhich they perform services do not (orever cease to) meet the 85 percent thresh-old described in § 301.7705–1(b)(17) ofthis chapter; and

May 23, 2016 Bulletin No. 2016–211004

(ii) In the case of a service agreementdescribed in § 31.3504–2(b)(2) that is nota CPEO contract (and thus the individualscovered by that contract are not coveredemployees), or if this section does notapply to the contract under paragraph (f)of this section, notify, or be accompaniedby a notification to, the client that theservice agreement or contract is not cov-ered by section 3511 and does not alter theclient’s liability for federal employmenttaxes on remuneration remitted by theCPEO to the employees covered by theservice agreement or contract.

(h) Penalties—(1) In general. A CPEOthat is treated as an employer of a coveredemployee under this section and that isrequired to meet the reporting require-ments of an employer is subject to thesame penalties and additions to tax as anemployer with respect to such reportingrequirements, including but not limited topenalties and additions to tax under sec-tions 6651, 6656, 6672, 6721, 6722, and6723.

(2) Failures to timely make reports re-quired under section 3511. CPEOs aresubject to penalty under section 6652(n)with respect to reports required to bemade to the IRS in paragraphs (g)(1) and(g)(3) of this section and reports requiredto be made to customers in paragraph(g)(4) of this section.

(3) Failures to attach Schedule R. ACPEO is subject to penalty under section6652(n) for failure to attach Schedule R(or successor form) to Forms 941 or 940as required by paragraph (g)(3)(ii) of thissection. A CPEO is also subject to penaltyunder section 6723 for failure to includethe EIN of each customer on Schedule Rof Form 941 or 940. See § 301.6723–1 ofthis chapter for the application of the sec-tion 6723 penalty in the case of multiplefailures on a single document.

(4) Failures to file on magnetic media.With respect to the requirement in para-graph (g)(3)(ii) of this section that aCPEO must file Forms 940 and 941, alongwith all required schedules, on magneticmedia, a failure to file on magnetic mediadoes not constitute a failure to file forpurposes of section 6651(a)(1) nor does itconstitute a failure to make a report forpurposes of section 6652(n). Rather, therequirement to file Forms 940 and 941 on

magnetic media is a condition of main-taining certification as a CPEO.

(i) Effective/applicability date. Theserules are effective on and after the date ofpublication of the Treasury decisionadopting these rules as final or temporaryregulations. Taxpayers may rely on theserules beginning July 1, 2016, and untilfinal or temporary regulations are pub-lished.


Par. 3. The authority citation for part301 is amended by adding entries in nu-merical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.7705–1 also issued under

26 U.S.C. 7705(h).Section 301.7705–2 also issued under

26 U.S.C. 7705(h).* * * * *Par. 4. Sections 301.7705–1 and

301.7705–2 are added to read as follows:

§ 301.7705–1 Certified professionalemployer organization.

(a) The definitions set forth in this sec-tion apply for purposes of this section,§§ 31.3511–1 and 301.7705–2, and sec-tions 3302(h), 3303(a)(4), 6053(c)(8), and7528(b)(4).

(b) [The text of proposed § 301.7705–1(b)(1) through (2) is the same as the textof § 301.7705–1T(b)(1) through (2) pub-lished elsewhere in this issue of the Inter-nal Revenue Bulletin].

(3) CPEO contract means a servicecontract between a CPEO and a customerthat is in writing and provides that, withrespect to an individual providing servicesto the customer, the CPEO will—

(i) Assume responsibility for paymentof wages to the individual, without regardto the receipt or adequacy of paymentfrom the customer for the services;

(ii) Assume responsibility for report-ing, withholding, and paying any applica-ble federal employment taxes with respectto the individual’s wages, without regardto the receipt or adequacy of paymentfrom the customer for the services;

(iii) Assume responsibility for any em-ployee benefits that the service contractmay require the CPEO to provide to theindividual, without regard to the receipt or

adequacy of payment from the customerfor such benefits;

(iv) Assume responsibility for recruit-ing, hiring, and firing the individual inaddition to the customer’s responsibilityfor recruiting, hiring, and firing the indi-vidual;

(v) Maintain employee records relatingto the individual; and

(vi) Agree to be treated as a CPEO forpurposes of section 3511 with respect tothe individual.

(4) [The text of proposed § 301.7705–1(b)(4) is the same as the text of§ 301.7705–1T(b)(4) published elsewherein this issue of the Internal Revenue Bul-letin].

(5) Covered employee means, with re-spect to a customer, any individual (otherthan a self-employed individual, as de-fined in paragraph (b)(14) of this section)who performs services for the customerand who is covered by a CPEO contractbetween the CPEO and the customer.

(6) Customer—(i) In general. Exceptas provided in paragraph (b)(6)(ii) of thissection, a customer is any person whoenters into a CPEO contract with a CPEO.

(ii) Persons who are not customers. Aprovider of employment-related servicesthat uses its own EIN for filing federalemployment tax returns on behalf of itsclients (or who used its own EIN imme-diately prior to entering into a CPEO con-tract with the CPEO) is not a customer,even if it has entered into a CPEO contractwith the CPEO.

(7) [The text of proposed § 301.7705–1(b)(7) through (13) is the same as the textof § 301.7705–1T(b)(7) through (13) pub-lished elsewhere in this issue of the Inter-nal Revenue Bulletin].

(14) Self-employed individual meansan individual with net earnings from self-employment (as defined in section1402(a) and without regard to the excep-tions thereunder) derived from providingservices covered by a CPEO contract,whether such net earnings from self-employment are derived from providingservices as a non-employee to a customerof the CPEO, from the individual’s owntrade or business as a sole proprietor cus-tomer of the CPEO, or as an individualwho is a partner in a partnership that is acustomer of the CPEO, but only with re-gard to such net earnings.

Bulletin No. 2016–21 May 23, 20161005

(15) [The text of proposed § 301.7705–1(b)(15) is the same as the text of§ 301.7705–1T(b)(15) published else-where in this issue of the Internal Reve-nue Bulletin].

(16) Work site means a physical loca-tion at which an individual regularly per-forms services for a customer of a CPEOor, if there is no such location, the locationfrom which the customer assigns work tothe individual. A work site may not be theindividual’s residence or a telework siteunless the customer requires the individ-ual to work at that site. For purposes ofthis paragraph (b)(16), work sites that arecontiguous locations will be treated as asingle physical location and thus a singlework site, and noncontiguous locationsthat are not reasonably proximate will betreated as separate physical locations andthus separate work sites. A CPEO maytreat noncontiguous locations that are rea-sonably proximate as a single physicallocation and thus a single work site. Anytwo work sites that are separated by 35 ormore miles or that operate in a differentindustry or industries will not be treated asreasonably proximate for purposes of thisparagraph (b)(16).

(17) Work site employee—(i) In general.A work site employee means, with respectto a customer, a covered employee whoperforms services for such customer at awork site where at least 85 percent of theindividuals performing services for the cus-tomer are covered employees of the customer.

(ii) Self-employed individuals. Solelyfor purposes of determining whether the85 percent threshold described in para-graph (b)(17)(i) of this section is met, aself-employed individual described inparagraph (b)(14) of this section is treatedas a covered employee if such individualwould be a covered employee but for theexclusion of self-employed individualsfrom the definition of covered employeein paragraph (b)(5) of this section.

(iii) Excluded employees. In determin-ing whether the 85 percent threshold de-scribed in paragraph (b)(17)(i) of this sec-tion is met, an individual that is anexcluded employee described in section414(q)(5) is not treated either as an indi-vidual providing services or a coveredemployee.

(iv) Treatment for calendar quarter. Acovered employee will be considered a

work site employee for the entirety of acalendar quarter if the employee qualifiesas a work site employee at any time dur-ing that quarter.

(v) Separate determination for eachwork site. The determination of whether acovered employee is a work site employeeis made separately with regard to eachwork site at which the covered employeeregularly provides services and for eachcustomer for which the covered employeeis providing services. A covered employeemay be determined to be a work site em-ployee of more than one work site duringa calendar quarter.

(c) [The text of proposed § 301.7705–1(c)(1) is the same as the text of§ 301.7705–1T(c)(1) published elsewhere inthis issue of the Internal Revenue Bulletin].

(2) Definitions related to section 3511.Paragraphs (b)(3), (5), (6), (14), (16), and(17) of this section are applicable on thedate of publication of the Treasury deci-sion adopting these rules as final or tem-porary regulations.

§ 301.7705–2 CPEO certificationprocess.

[The text of proposed § 301.7705–2 isthe same as the text of § 301.7705–2Tpublished elsewhere in this issue of theInternal Revenue Bulletin].

Kirsten B. Wielobob,Acting Deputy Commissioner

for Services and Enforcement.


Notice of ProposedRulemaking by Cross-reference to TemporaryRegulations

Self-employment TaxTreatment of Partners in aPartnership that Owns aDisregarded Entity.

REG–114307–15


ACTION: Notice of proposed rulemakingby cross-reference to temporaryregulations.

SUMMARY: In the Rules and Regula-tions section of this issue of the InternalRevenue Bulletin, the IRS is issuing tem-porary regulations that clarify the employ-ment tax treatment of partners in a part-nership that owns a disregarded entity.These regulations affect partners in a part-nership that owns a disregarded entity.The text of those temporary regulationsserves as the text of these proposedregulations.

DATES: Comments and requests for apublic hearing must be received by Au-gust 2, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–114307–15), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–114307–15), Courier’sDesk, Internal Revenue Service, 1111 Con-stitution Avenue, N.W., Washington, DC20224 or sent electronically, via the Fed-eral eRulemaking Portal at http://www.regulations.gov/ ( IRS REG–114307–15).

FOR FUTHER INFORMATIONCONTACT:

Concerning the proposed regulations,Andrew K. Holubeck at (202) 317-4774;concerning submission of comments, or arequest for a public hearing please contactRegina Johnson at (202) 317-6901 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION

Background and Explanation ofProvisions

Temporary regulations in the Rulesand Regulations section of this issue ofthe Internal Revenue Bulletin amend theProcedure and Administration Regula-tions (26 CFR part 301) relating to section7701. The temporary regulations clarifythat an entity disregarded as separate fromits owner (a disregarded entity), that istreated as a corporation for purposes ofemployment taxes imposed under subtitle

May 23, 2016 Bulletin No. 2016–211006

C, is not treated as a corporation for pur-poses of employing its individual owner(who is treated as a sole proprietor) or forpurposes of employing an individual thatis a partner in a partnership that owns thedisregarded entity. Rather, the entity isdisregarded as an entity separate from itsowner for this purpose. The partners aresubject to the same self-employment taxrules as partners in a partnership that doesnot own an entity that is disregarded asseparate from its owner. The text of thoseregulations also serves as the text of theseproposed regulations. The preamble to thetemporary regulations explains theamendments.

Special Analysis

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It has also been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations, andbecause the regulations do not impose acollection of information on small entities,the Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Internal RevenueCode, this notice of proposed rulemakingwill be submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The Treasury Department andthe IRS request comments on all aspectsof the proposed rules. All comments willbe available at www.regulations.gov orupon request. A public hearing will bescheduled if requested in writing by anyperson that timely submits written com-ments. If a public hearing is scheduled,notice of the date, time, and place for thehearing will be published in the FederalRegister.


The principal author of these regula-tions is Andrew Holubeck of the Office ofthe Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities). However, other personnel fromthe IRS and the Treasury Department par-ticipated in their development.

* * * * *Proposed Amendments to theRegulations

Accordingly, 26 CFR part 301 is pro-posed to be amended as follows:


Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:


by revising paragraph (c)(2)(iv)(C)(2) andadding paragraph (e)(8)(i) to read as fol-lows:

§ 301.7701–2 Business entities;definitions

* * * * *(c) * * *(2) * * *(iv) * * *(C) * * *(2) [The text of the proposed amend-

ment to § 301.7701–2(c)(2)(iv)(C)(2) isthe same as the text of § 301.7701–2T(c)(2)(iv)(C)(2) published elsewhere inthis issue of the Internal Revenue Bulletin].

* * * * *(e) * * *(8)(i) [ The text of the proposed

amendments to § 301.7701–2(e)(8)(i) isthe same as the text of § 301.7701–2T(e)(8)(i) published elsewhere in this is-sue of the Internal Revenue Bulletin].




Notice of ProposedRulemaking

Treatment of CertainDomestic EntitiesDisregarded as SeparateFrom Their Owners asCorporations for Purposesof Section 6038AREG–127199–15


ACTION: Notice of proposedrulemaking.

SUMMARY: This document containsproposed regulations that would treat adomestic disregarded entity wholly ownedby a foreign person as a domestic corpo-ration separate from its owner for the lim-ited purposes of the reporting, recordmaintenance and associated compliancerequirements that apply to 25 percentforeign-owned domestic corporations un-der section 6038A of the Internal RevenueCode. These changes are intended to pro-vide the IRS with improved access to in-formation that it needs to satisfy its obli-gations under U.S. tax treaties, taxinformation exchange agreements andsimilar international agreements, as wellas to strengthen the enforcement of U.S.tax laws.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by August 8, 2016.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–127199–15), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand deliv-ered between the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–127199–15),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW., Washing-ton, DC., or sent electronically, via the Fed-eral eRulemaking Portal at http://www.regulations.gov (IRS REG–127199–15).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Ronald M. Gootzeit, (202)317-6937; concerning submissions of

Bulletin No. 2016–21 May 23, 20161007

comments and/or requests for a hearing,Regina Johnson, (202) 317-6901 (not toll-free numbers).



The collection of information con-tained in this notice of proposed rulemak-ing has been previously reviewed and ap-proved by the Office of Management andBudget in accordance with the PaperworkReduction Act of 1995 (44 U.S.C.3507(d)) under control number 1545-1191. The estimated average annual re-cordkeeping burden per recordkeeper is10 hours. The estimated reporting burdenis being reported under Form 5472 (OMB# 1545–0123).

The collection of information in thisproposed regulation is in sections1.6038A–1 through 1.6038A–3 and1.6038A–5. This information is requiredin order to provide the IRS with improvedaccess to information that it needs to sat-isfy its obligations under U.S. tax treaties,tax information exchange agreements, andsimilar international agreements, as wellas to strengthen the enforcement of U.S.tax laws. The likely respondents areforeign-owned domestic entities that aredisregarded as separate from their owners.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less it displays a valid control numberassigned by the Office of Managementand Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

Sections 301.7701–1 through301.7701–3 (“the entity classification reg-ulations”) classify a business entity withtwo or more members as either a corpo-ration or a partnership, and a businessentity with a single owner as either acorporation or an entity disregarded asseparate from its owner (“disregarded en-tity”). Certain domestic business entities,such as limited liability companies

(“LLCs”), are classified by default as part-nerships (if they have more than onemember) or as disregarded entities (if theyhave only one owner) but are eligible toelect for federal tax purposes to be classi-fied as corporations. Under special rules,an entity that is otherwise disregarded isnot disregarded for certain excise and em-ployment tax purposes. Section301.7701–2(c)(2)(iv) and (v).

Some disregarded entities are not obli-gated to file a return or obtain an employeridentification number (“EIN”). In the ab-sence of a return filing obligation (andassociated record maintenance require-ments) or the identification of a responsi-ble party as required in applying for anEIN, it is difficult for the United States tocarry out the obligations it has undertakenin its tax treaties, tax information ex-change agreements and similar interna-tional agreements to provide other juris-dictions with relevant information on U.S.entities with owners that are tax residentin the partner jurisdiction or otherwisehave a tax nexus with respect to the part-ner jurisdiction.

Section 6001 of the Internal RevenueCode (“Code”) provides that every personliable for any tax imposed by the Code, orfor the collection thereof, shall keep suchrecords, render such statements, makesuch returns and comply with such rulesand regulations as the Secretary may fromtime to time prescribe, and that wheneverin the judgment of the Secretary it is nec-essary, he may require any person, bynotice served upon such person or by reg-ulations, to make such returns, rendersuch statements, or keep such records, asthe Secretary deems sufficient to showwhether or not such person is liable fortax. Thus, the Treasury Department andthe IRS have broad authority under sec-tion 6001 of the Code to promulgate reg-ulations to require the keeping of recordsand the reporting of information by per-sons who may be liable for any tax. TheCode also requires many categories ofpersons to file returns, even if no tax isowed in a particular year. For example, allcorporations organized in the UnitedStates must file annual income tax returns,which may include schedules requiringthe identification of owners exceedingspecified ownership thresholds. More-over, foreign corporations engaged in a

trade or business in the United States(“U.S. trade or business”) must file annualincome tax returns. Section 6012(a)(2);section 1.6012–2. Domestic partnershipsmust file information returns with sched-ules identifying each partner. Section6031; section 1.6031(a)–1. In addition,domestic corporations that are at least25% foreign-owned are subject to specificinformation reporting and record mainte-nance requirements. Section 6038A.

All entities, including disregarded en-tities, must have an EIN to file a requiredreturn. Section 6109(a)(1); see section301.6109–1(a)(1)(ii)(C) and (b). An en-tity must also have an EIN in order toelect to change its classification. An entitythat accepts its default classification and isnot required to file a return need not ob-tain an EIN. Because a domestic single-member LLC is classified as a disregardedentity by default rather than by electionand has no separate federal tax return fil-ing requirements, there is typically no fed-eral tax requirement for it to obtain anEIN. Other applicable federal or state lawsmay require an entity to obtain an EIN.For example, pursuant to federal law, fi-nancial institutions in the United Statesgenerally require an entity to have an EINto open an account. See 31 CFR1020.220(a)(1)(i)(A)(4).

An entity obtains an EIN by filingForm SS–4, Application for EmployerIdentification Number, in which the entitymust identify a responsible party. The in-structions to Form SS–4 define “respon-sible party” for an entity (including a dis-regarded entity) that is not traded on apublic exchange or registered with the Se-curities and Exchange Commission as“the individual who has a level of controlover, or entitlement to, the funds or assetsin the entity that, as a practical matter,enables the individual, directly or indi-rectly, to control, manage, or direct theentity and the disposition of its funds andassets.” The entity must also report anysubsequent change in the responsibleparty. See section 301.6109–1(d)(2)(ii).

When an entity, such as an LLC, isclassified as a corporation or a partnershipfor tax purposes, general ownership andaccounting information is available to theIRS through the return filing and EIN ap-plication requirements. However, a disre-garded entity is not subject to a separate

May 23, 2016 Bulletin No. 2016–211008

income or information return filing re-quirement. Its owner is treated as owningdirectly the entity’s assets and liabilities,and the information available with respectto the disregarded entity depends on theowner’s own return filings, if any are re-quired. For a disregarded entity that isformed in the United States and whollyowned by a foreign corporation, foreignpartnership, or nonresident alien individ-ual, generally no U.S. income or informa-tion return must be filed if neither thedisregarded entity nor its owner receivedany U.S. source income or was engaged ina U.S. trade or business during the taxableyear. Moreover, if a disregarded entityonly receives certain types of U.S. sourceincome, such as portfolio interest or U.S.source income that is fully withheld uponat source, its owner may not have a U.S.return filing requirement. Even in caseswhen the disregarded entity has an EIN, aswell as in cases when income earnedthrough a disregarded entity must be re-ported on its owner’s return (for example,income from a U.S. trade or business), itmay be difficult to associate the incomewith the disregarded entity based solelyon the owner’s return.

Although ownership and accountinginformation is generally available underthe reporting requirements established bythe U.S. federal tax system with respect tomany types of domestic entities, the ab-sence of specific return filing and associ-ated recordkeeping requirements forforeign-owned, single-member domesticentities hinders law enforcement effortsand compliance with international stan-dards of transparency and cooperation inthe area of tax information exchange.These difficulties have been noted in re-views of the U.S. legal system by interna-tional organizations, including the Finan-cial Action Task Force and the GlobalForum on Transparency and Exchange ofInformation for Tax Purposes, which isaffiliated with the Organisation for Eco-nomic Co-operation and Development.The lack of ready access to information onownership of, and transactions involving,these entities also makes it difficult for theIRS to ascertain whether the entity or itsowner is liable for any federal tax.

In general, section 6038A imposes re-porting and recordkeeping requirements(together with certain procedural compli-

ance requirements) on domestic corpora-tions that are 25-percent foreign-owned.They are required to file an annual returnon Form 5472, Information Return of a25% Foreign-Owned U.S. Corporation ora Foreign Corporation Engaged in a U.S.Trade or Business (Under Sections 6038Aand 6038C of the Internal Revenue Code),with respect to each related party withwhich the reporting corporation has hadany “reportable transactions.” See section1.6038A–2. These corporations must keepthe permanent books of account or recordsas required by section 6001 that are suf-ficient to establish the accuracy of thefederal income tax return of the corpora-tion, including information, documents, orrecords to the extent they may be relevantto determine the correct U.S. tax treatmentof transactions with related parties. Seesection 1.6038A–3.


These proposed regulations wouldamend section 301.7701–2(c) to treat adomestic disregarded entity that is whollyowned by one foreign person as a domes-tic corporation separate from its owner forthe limited purposes of the reporting andrecord maintenance requirements (includ-ing the associated procedural compliancerequirements) under section 6038A. Aswith the existing special rules with respectto employment and excise taxes, theseproposed regulations would not alter theframework of the existing entity classifi-cation regulations, including the treatmentof certain entities as disregarded. Theseregulations are intended to provide theIRS with improved access to informationthat it needs to satisfy its obligations un-der U.S. tax treaties, tax information ex-change agreements and similar interna-tional agreements, as well as to strengthenthe enforcement of U.S. tax laws.

Because the proposed regulationswould treat the affected domestic entitiesas foreign-owned domestic corporationsfor the specific purposes of section 6038Aunder the proposed regulations, and be-cause such entities are foreign-owned,they would be reporting corporationswithin the meaning of section 6038A.Consequently, they would be required tofile the Form 5472 information return withrespect to reportable transactions betweenthe entity and its foreign owner or other

foreign related parties (transactions thatwould have been regarded under generalU.S. tax principles if the entity had been,in fact, a corporation for U.S. tax pur-poses) and would also be required tomaintain records sufficient to establish theaccuracy of the information return and thecorrect U.S. tax treatment of such trans-actions. In addition, because these entitieswould have a filing obligation, they wouldbe required to obtain an EIN by filing aForm SS–4 that includes responsibleparty information.

To ensure that such entities are re-quired to report all transactions withforeign related parties, these regulationswould specify as an additional report-able category of transaction for thesepurposes any transaction within themeaning of section 1.482–1(i)(7) (withsuch entities being treated as separatetaxpayers for the purpose of identifyingtransactions and being subject to re-quirements under section 6038A) to theextent not already covered by anotherreportable category. The term “transac-tion” is defined in section 1.482–1(i)(7)to include any sale, assignment, lease,license, loan, advance, contribution, orother transfer of any interest in or a rightto use any property or money, as well asthe performance of any services for thebenefit of, or on behalf of, another tax-payer. For example, under these pro-posed regulations, contributions and dis-tributions would be consideredreportable transactions with respect tosuch entities. Accordingly, a transactionbetween such an entity and its foreignowner (or another disregarded entity ofthe same owner) would be considered areportable transaction for purposes ofthe section 6038A reporting and recordmaintenance requirements, even though,because it involves a disregarded entity,it generally would not be considered atransaction for other purposes, such asmaking an adjustment under section482. The penalty provisions associatedwith failure to file the Form 5472 andfailure to maintain records would applyto these entities as well.

The proposed regulations would alsoprovide that the exceptions to the recordmaintenance requirements in section1.6038A–1(h) and (i) for small corpora-

Bulletin No. 2016–21 May 23, 20161009

tions and de minimis transactions will notapply to these entities.

Consistent with the changes contem-plated by these proposed regulations, theIRS is also considering modifications tocorporate, partnership, and other tax orinformation returns (or their instructions)to require the filer of these returns to iden-tify all the foreign and domestic disre-garded entities it owns.

The proposed regulations would im-pose a filing obligation on a foreign-owned disregarded entity for reportabletransactions it engages in even if its for-eign owner already has an obligation toreport the income resulting from thosetransactions—for example, transactionsresulting in income effectively connectedwith the conduct of a U.S. trade or busi-ness. The Treasury Department and theIRS request comments on possible alter-native methods for reporting the disre-garded entity’s transactions in suchcases.

Proposed Effective/Applicability Date

The regulations are proposed to be ap-plicable for taxable years ending on orafter the date that is 12 months after thedate these regulations are published asfinal regulations in the Federal Register.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory assessment is notrequired. It has also been determined thatsection 553(b) and (d) of the Administra-tive Procedure Act (5 U.S.C. chapter 5)does not apply to these regulations. Pur-suant to the Regulatory Flexibility Act (5U.S.C. chapter 6), it is hereby certifiedthat this regulation will not have a signif-icant economic impact on a substantialnumber of small entities. Accordingly, aregulatory flexibility analysis is not re-quired. This certification is based on thefact that these regulations will primarilyaffect a small number of foreign-owneddomestic entities that do not themselvesotherwise have a U.S. return filing re-quirement, and that the requirement to filea return for these entities will not imposea significant burden on them. Pursuant to

section 7805(f), this notice of proposedrulemaking has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small entities.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under the “Addresses”heading. The Treasury Department andthe IRS request comments on aspects ofthe proposed rules for which additionalguidance is desired. All comments will beavailable at www.regulations.gov or uponrequest. A public hearing will be sched-uled if requested in writing by any personthat timely submits written comments. If apublic hearing is scheduled, then notice ofthe date, time, and place for the publichearing will be published in the FederalRegister.


The principal author of these regula-tions is Ronald M. Gootzeit, Office ofAssociate Chief Counsel (International).However, other personnel from the Trea-sury Department and the IRS participatedin their development.

* * * * *

26 CFR Part 1

Income taxes, Reporting and record-keeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Ex-cise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeepingrequirements.

Proposed Amendments to theRegulations

Accordingly, 26 CFR parts 1 301 areproposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by revising the entries

for §§ 1.6038A–1 and 1.6038A–2 to readin part as follows:

Authority: 26 U.S.C. 7805 * * ** * * * *Section 1.6038A–1 also issued under

26 U.S.C. 6001.Section 1.6038A–2 also issued under

26 U.S.C. 6001.* * * * *Par. 2. Section 1.6038A–1 is amended

as follows:1. Paragraph (c)(1) is amended by add-

ing a sentence at the end of the paragraph.2. The first sentence of paragraph (h) is

revised.3. The first sentence of paragraph (i)(1)

is revised.4. Paragraph (n)(1) is amended by add-

ing a sentence at the end of the paragraph.5. Paragraph (n)(2) is amended by add-

ing a sentence at the end of the paragraph.The additions and revisions read as fol-

lows:

§ 1.6038A–1 General requirements anddefinitions.

* * * * *(c) * * *(1) * * * A domestic business entity

that is wholly owned by one foreign per-son and that is otherwise classified under§ 301.7701–3(b)(1)(ii) of this chapter asdisregarded as an entity separate from itsowner is treated as an entity separate fromits owner and classified as a domestic cor-poration for purposes of section 6038A.See § 301.7701–2(c)(2)(vi) of this chap-ter.

* * * * *(h) Small corporation exception. A re-

porting corporation (other than an entitythat is treated as a reporting corporationby reason of § 301.7701–2(c)(2)(vi) ofthis chapter) that has less than$10,000,000 in U.S. gross receipts for ataxable year is not subject to§§ 1.6038A–3 and 1.6038A–5 for thattaxable year.* * *

(i) Safe harbor for reporting corpora-tions with related party transactions ofde minimis value—(1) In general. A re-porting corporation (other than an entitythat is treated as a reporting corporationby reason of § 301.7701–2(c)(2)(vi) ofthis chapter) is not subject to§§ 1.6038A–3 and 1.6038A–5 for any

May 23, 2016 Bulletin No. 2016–211010

taxable year in which the aggregatevalue of all gross payments it makes toand receives from foreign related partieswith respect to related party transactions(including monetary, nonmonetary con-sideration, and the value of transactionsinvolving less than full consideration) isnot more than $5,000,000 and is lessthan 10 percent of its U.S. gross in-come.* * *

* * * * *(n)* * *(1) * * * The last sentence of paragraph

(c)(1) of this section (relating to certaindomestic business entities), the parenthet-ical language in paragraph (h) of this sec-tion (relating to entities that are treated asreporting corporations by reason of§ 301.7701–2(c)(2)(vi) of this chapter),and the parenthetical language in para-graph (i)(1) of this section (relating toentities that are treated as reporting cor-porations by reason § 301.7701–2(c)(2)(vi) of this chapter) apply to tax-able years of such entities ending on orafter the date that is 12 months after thedate of publication of the Treasury deci-sion adopting these rules as final regula-tions in the Federal Register.

(2) * * * Paragraphs (b)(3)(xi) and(b)(9) and the last sentence of paragraph(d) of § 1.6038A–2 apply to taxable yearsof the entities described in § 301.7701–2(c)(2)(vi) of this chapter ending on orafter the date that is 12 months after thedate of publication of the Treasury de-cision adopting these rules as final reg-ulations in the Federal Register.

* * * * *Par. 3. Section 1.6038A–2 is amended

as follows:1. In paragraph (b)(3)(ix), remove the

word “and”.2. In paragraph (b)(3)(x), remove the

period at the end of the paragraph and add“; and” in its place.

3. Add paragraph (b)(3)(xi).4. Add paragraph (b)(9).5. Add a sentence at the end of para-

graph (d).The additions and revisions read as fol-

lows:

§ 1.6038A–2 Requirements of return.

* * * * *(b) * * *

(3) * * *(xi) With respect to an entity that is

treated as a reporting corporation by rea-son of § 301.7701–2(c)(2)(vi) of thischapter, any other transaction as definedby § 1.482–1(i)(7), such as amounts paidor received in connection with the forma-tion, dissolution, acquisition and disposi-tion of the entity, including contributionsto and distributions from the entity.

* * * * *(9) Examples. The application of para-

graph (b)(3) of this section may be illus-trated by the following examples:

Example 1. (i) In year 1, W, a foreign corpora-tion, forms and contributes assets to X, a domesticlimited liability company that does not elect to betreated as a corporation under § 301.7701–3(c) ofthis chapter. In year 2, W contributes funds to X. Inyear 3, X makes a payment to W. In year 4, X, inliquidation, distributes its assets to W.

(ii) In accordance with § 301.7701–3(b)(1)(ii) ofthis chapter, X is disregarded as an entity separatefrom W. In accordance with § 301.7701–2(c)(2)(vi)of this chapter, X is treated as an entity separatefrom W and classified as a domestic corporationfor purposes of section 6038A. In accordance withparagraphs (a)(2) and (b)(3) of this section, eachof the transactions in years 1 through 4 is a re-portable transaction with respect to X. Therefore,X has a section 6038A reporting and record main-tenance requirement for each of those years.

Example 2. (i) The facts are the same as inExample 1 of this paragraph (b)(9) except that inyear 1 W also forms and contributes assets to Y,another domestic limited liability company thatdoes not elect to be treated as a corporation under§ 301.7701–3(c) of this chapter. In year 1, X andY form and contribute assets to Z, another domes-tic limited liability company that does not elect tobe treated as a corporation under § 301.7701–3(c)of this chapter. In year 2, X transfers funds to Z. Inyear 3, Z makes a payment to Y. In year 4, Zdistributes its assets to X and Y in liquidation.

(ii) In accordance with § 301.7701–3(b)(1)(ii) ofthis chapter, Y and Z are disregarded as entitiesseparate from each other, W, and X. In accordancewith § 301.7701–2(c)(2)(vi) of this chapter, Y, Z andX are treated as entities separate from each other andW, and are classified as domestic corporations forpurposes of section 6038A. In accordance with para-graph (b)(3) of this section, each of the transactionsin years 1 through 4 involving Z is a reportabletransaction with respect to Z. Similarly, the contri-bution to Y in year 1, the payment to Y in year 3, andthe distribution to Y in year 4 are reportabletransactions with respect to Y. Moreover, X’sfunds transfer to Z in year 2 is a reportable trans-action. Therefore, Z has a section 6038A reportingand record maintenance requirement for years 1through 4, Y has a section 6038A reporting andrecord maintenance requirement for years 1, 3 and4, and X has a section 6038A reporting and recordmaintenance requirement in year 2 in addition toits section 6038A reporting and record mainte-

nance described in Example 1 of this paragraph(b)(9).

(d) * * * In the case of an entity that istreated as a reporting corporation by rea-son of § 301.7701–2(c)(2)(vi) of thischapter, Form 5472 must be filed at suchtime and in such manner as the Commis-sioner may prescribe in forms or instruc-tions.

* * * * *


Par. 4. The authority citation for part301 continues in part to read as follows:


by revising the last sentence of paragraph(a) and adding paragraphs (c)(2)(vi) and(e)(9) to read as follows:

§ 301.7701–2 Business entities;definitions.

(a) * * * But see paragraphs (c)(2)(iii)through (vi) of this section for specialrules that apply to an eligible entity that isotherwise disregarded as an entity sepa-rate from its owner.

* * * * *(c) * * *(2) * * *(vi) Special rule for reporting under

section 6038A—(A) In general. An en-tity that is disregarded as separate fromits owner for any purpose under thissection is treated as an entity separatefrom its owner and classified as a cor-poration for purposes of section 6038Aif—

(1) The entity is a domestic entity; and(2) One foreign person has direct or

indirect sole ownership of the entity.(B) Definitions—(1) Indirect sole own-

ership. For purposes of paragraph(c)(2)(vi)(A)(2) of this section, indirectsole ownership means ownership by oneperson entirely through one or more en-tities disregarded as separate from theirowners or through grantor trusts, regard-less of whether any such disregardedentity or grantor trust is domestic orforeign.

(2) Entity disregarded as separatefrom its owner. For purposes of this para-graph (c)(2)(vi)(B), an entity disregardedas separate from its owner is an entity

Bulletin No. 2016–21 May 23, 20161011

described in paragraph (c)(2)(i) of thissection, without regard to the exceptionsprovided in paragraphs (c)(2)(ii) though(vi) of this section.

(3) Grantor trust. For purposes of thisparagraph (c)(2)(vi)(B), a grantor trust isany portion of a trust that is treated asowned by the grantor or another personunder subpart E of subchapter J of chapter1 of the Code.

* * * * *(e) * * *(9) Reporting required under section

6038A. Paragraph (c)(2)(vi) of this sectionapplies to taxable years ending on or afterthe date that is 12 months after the date ofpublication of the Treasury decisionadopting these rules as final regulations inthe Federal Register.




May 23, 2016 Bulletin No. 2016–211012

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2016–21 May 23, 2016i

Numerical Finding List1

Bulletins 2016–1 through 2016–21

Announcements:

2016-1, 2016-3 I.R.B. 2832016-2, 2016-3 I.R.B. 2832016-3, 2016-4 I.R.B. 2942016-4, 2016-6 I.R.B. 3132016-5, 2016-8 I.R.B. 3562016-6, 2016-10 I.R.B. 4092016-7, 2016-8 I.R.B. 3562016-8, 2016-9 I.R.B. 3672016-9, 2016-9 I.R.B. 3672016-10, 2016-9 I.R.B. 3672016-11, 2016-10 I.R.B. 4112016-12, 2016-16 I.R.B. 5892016-13, 2016-13 I.R.B. 5142016-14, 2016-14 I.R.B. 5352016-15, 2016-17 I.R.B. 6362016-16, 2016-18 I.R.B. 6972016-17, 2016-20 I.R.B. 8542016-18, 2016-19 I.R.B. 7412016-19, 2016-19 I.R.B. 7412016-20, 2016-21 I.R.B. 991

Notices:

2016-1, 2016-2 I.R.B. 2652016-2, 2016-2 I.R.B. 2652016-3, 2016-3 I.R.B. 2782016-4, 2016-3 I.R.B. 2792016-5, 2016-6 I.R.B. 3022016-6, 2016-4 I.R.B. 2872016-7, 2016-5 I.R.B. 2962016-8, 2016-6 I.R.B. 3042016-9, 2016-6 I.R.B. 3062016-10, 2016-6 I.R.B. 3072016-11, 2016-6 I.R.B. 3122016-12, 2016-6 I.R.B. 3122016-13, 2016-7 I.R.B. 3142016-14, 2016-7 I.R.B. 3152016-15, 2016-13 I.R.B. 4862016-16, 2016-7 I.R.B. 3182016-17, 2016-9 I.R.B. 3582016-18, 2016-9 I.R.B. 3592016-19, 2016-9 I.R.B. 3622016-20, 2016-9 I.R.B. 3622016-21, 2016-12 I.R.B. 4652016-22, 2016-13 I.R.B. 4882016-23, 2016-13 I.R.B. 4902016-24, 2016-13 I.R.B. 4922016-25, 2016-13 I.R.B. 4932016-26, 2016-14 I.R.B. 5332016-27, 2016-15 I.R.B. 5762016-28, 2016-15 I.R.B. 5762016-29, 2016-18 I.R.B. 6732016-30, 2016-18 I.R.B. 6762016-32, 2016-21 I.R.B. 878

Proposed Regulations:

REG-103380-05, 2016-16 I.R.B. 614REG-118867-10, 2016-10 I.R.B. 411REG-147310-12, 2016-7 I.R.B. 336REG-150349-12, 2016-11 I.R.B. 440REG-138344-13, 2016-4 I.R.B. 294REG-123867-14, 2016-12 I.R.B. 484REG-125761-14, 2016-7 I.R.B. 322REG-135734-14, 2016-18 I.R.B. 712REG-135734-14, 2016-20 I.R.B. 854REG-100861-15, 2016-8 I.R.B. 356REG-108060-15, 2016-17 I.R.B. 636REG-109822-15, 2016-14 I.R.B. 535REG-114307-15, 2016-21 I.R.B. 1006REG-127199-15, 2016-21 I.R.B. 1007REG-127561-15, 2016-21 I.R.B. 991REG-127923-15, 2016-12 I.R.B. 473REG-129067-15, 2016-10 I.R.B. 421REG-133673-15, 2016-18 I.R.B. 697REG-134122-15, 2016-7 I.R.B. 334REG-101701-16, 2016-9 I.R.B. 368

Revenue Procedures:

2016-1, 2016-1 I.R.B. 12016-2, 2016-1 I.R.B. 1022016-3, 2016-1 I.R.B. 1262016-4, 2016-1 I.R.B. 1422016-5, 2016-1 I.R.B. 1882016-6, 2016-1 I.R.B. 2002016-7, 2016-1 I.R.B. 2392016-8, 2016-1 I.R.B. 2432016-10, 2016-2 I.R.B. 2702016-11, 2016-2 I.R.B. 2742016-13, 2016-4 I.R.B. 2902016-14, 2016-9 I.R.B. 3652016-15, 2016-11 I.R.B. 4352016-16, 2016-10 I.R.B. 3942016-17, 2016-11 I.R.B. 4362016-18, 2016-17 I.R.B. 6352016-19, 2016-13 I.R.B. 4972016-20, 2016-13 I.R.B. 4992016-21, 2016-14 I.R.B. 5332016-22, 2016-15 I.R.B. 5772016-23, 2016-16 I.R.B. 5812016-24, 2016-18 I.R.B. 6772016-25, 2016-18 I.R.B. 6782016-27, 2016-19 I.R.B. 7252016-28, 2016-20 I.R.B. 8532016-29, 2016-21 I.R.B. 8802016-30, 2016-21 I.R.B. 9812016-31, 2016-21 I.R.B. 988

Revenue Rulings:

2016-1, 2016-2 I.R.B. 2622016-2, 2016-4 I.R.B. 2842016-3, 2016-3 I.R.B. 2822016-4, 2016-6 I.R.B. 2992016-5, 2016-8 I.R.B. 344

Revenue Rulings:—Continued

2016-6, 2016-14 I.R.B. 5192016-7, 2016-10 I.R.B. 3912016-8, 2016-11 I.R.B. 4262016-9, 2016-14 I.R.B. 5302016-10, 2016-15 I.R.B. 5452016-11, 2016-19 I.R.B. 717

Treasury Decisions:

9745, 2016-2 I.R.B. 2569746, 2016-14 I.R.B. 5159748, 2016-8 I.R.B. 3479749, 2016-10 I.R.B. 3739750, 2016-10 I.R.B. 3749751, 2016-10 I.R.B. 3799752, 2016-10 I.R.B. 3859753, 2016-11 I.R.B. 4269754, 2016-11 I.R.B. 4329755, 2016-12 I.R.B. 4429756, 2016-12 I.R.B. 4509757, 2016-12 I.R.B. 4629759, 2016-15 I.R.B. 5459760, 2016-15 I.R.B. 5649761, 2016-20 I.R.B. 7439762, 2016-19 I.R.B. 7189763, 2016-20 I.R.B. 8009764, 2016-20 I.R.B. 8039765, 2016-20 I.R.B. 8149766, 2016-21 I.R.B. 8559767, 2016-21 I.R.B. 8579768, 2016-21 I.R.B. 862

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015–27 through 2015–52 is in Internal Revenue Bulletin2015–52, dated December 28, 2015.

May 23, 2016 Bulletin No. 2016–21ii

Finding List of Current Actions onPreviously Published Items1

Bulletins 2016–1 through 2016–21

Announcements:

2007-21Modified byAnn. 2016-1, 2016-3 I.R.B. 283

Notices:

2005-50Modified byNotice 2016-2, 2016-2 I.R.B. 265

2007-59Revoked byNotice 2016-16, 2016-7 I.R.B. 318

2013-54Supplemented byNotice 2016-17, 2016-9 I.R.B. 358

2014-79Superseded byNotice 2016-1, 2016-2 I.R.B. 265



Revenue Procedures:

1987-24Superseded byRev. Proc. 2016-22, 2016-15 I.R.B. 577


2009-14Modified byRev. Proc. 2016-30, 2016-21 I.R.B. 981



2014-64Supplemented byRev. Proc. 2016-18, 2016-17 I.R.B. 635

Revenue Procedures:—Continued









2015-14Amplified byRev. Proc. 2016-29, 2016-21 I.R.B. 880


2015-19Amplified byRev. Proc. 2016-23, 2016-16 I.R.B. 581





Revenue Procedures:—Continued




Revenue Rulings:

2005-3Modified byRev. Rul. 2016-8, 2016-11 I.R.B. 426

2008-15Revoked byRev. Rul. 2016-3, 2016-3 I.R.B. 282

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015–27 through 2015–52 is in Internal Revenue Bulletin2015–52, dated December 28, 2015.

Bulletin No. 2016–21 May 23, 2016iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

We Welcome Comments About the Internal Revenue BulletinIf you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.NW, IR-6230 Washington, DC 20224.

Internal Revenue ServiceWashington, DC 20224Official BusinessPenalty for Private Use, $300

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