Executory contract liabilities. This ruling provides guidance on when a taxpayer using an accrual method of accounting incurs a liability for services or insurance under section 461 of the Code.

Section 1274A - Inflation adjusted numbers for 2007. This ruling provides the dollar amounts, increased by the 2007 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2005-76 supplemented and superseded.

This notice announces that the IRS and Treasury will amend regulations section 30l.7701-2(b)(8) to include a Bulgarian entity on the list of entities always treated as corporations under section 7701 of the Code.

This procedure supersedes Rev. Proc. 98-20, 1998-1 C.B. 549, and sets forth the acceptable form of the written assurances (certification) that a real estate reporting person must obtain from the seller of a principal residence to except the sale or exchange of such principal residence from the information reporting requirements for real estate transactions under section 6045(e)(5) of the Code. Rev. Proc. 98-20 superseded.

This document provides procedures by which a taxpayer may obtain automatic consent to change its method of accounting for services or insurance to comply with Rev. Rul. 2007-3, page , in this Bulletin. Rev. Proc. 2002-9 modified and amplified.

The IRS has revoked its determination that Corporate Responsibility Capital Partners, Inc., of Washington, DC; HR-57 Center for the Advancement and Preservation of Jazz and Blues of Washington, DC; National Association of Credit Counseling, Inc., of Ft. Myers, FL; and Personal Credit Assistance, Inc., of Sacramento, CA, qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Code.

This document provides an automatic consent procedure allowing a taxpayer to make a change in method of accounting for certain depreciable or amortizable property after its disposition, waives the two-year rule in Rev. Rul. 90-38 with respect to certain changes in depreciation or amortization, and modifies other revenue procedures to conform with regulations section 1.446-1(e)(2)(ii)(d). Rev. Procs. 2000-38, 2000-50, and 2002-9 modified. Rev. Proc. 2004-11 superseded.

This procedure, which supersedes Rev. Proc. 2005-12, 2005-1 C.B. 311, provides guidance that continues the existing Pre-Filing Agreement (PFA) program with only minor changes related to the processing of PFAs. Rev. Proc. 2005-12 superseded.

This document changes the location of the public hearing on proposed regulations (REG-127819-06, 2006-48 I.R.B. 1013) concerning the amendments made by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) to section 199.

This document changes the location of the public hearing on proposed regulations (REG-136806-06, 2006-47 I.R.B. 950) relating to the standards for treating payments in lieu of taxes as generally applicable taxes for purposes of the private security or payment test.

This document changes the location of the public hearing on proposed regulations (REG-141901-05, 2006-47 I.R.B. 947) that provide guidance on taxation of the exchange of property for an annuity contract.

(1) Under § 461 of the Internal Revenue Code, when does a taxpayer using an accrual method of accounting incur a liability for services?

(2) Under § 461, when does a taxpayer using an accrual method of accounting incur a liability for insurance?

X is a corporation that uses an accrual method of accounting and files its federal income tax returns on a calendar year basis.

Situation 1. On December 15, 2006, X executes a contract with Y for the provision of services. The contract provides for services to begin on January 15, 2007, and end on January 31, 2007. Under the terms of the contract, payment for the services is due to Y on January 15, 2007, and X pays Y for the services on January 15, 2007. X uses the recurring item exception under § 1.461-5.

Situation 2. On December 15, 2006, X executes a contract with W, an insurance company regulated under state law, for the provision of insurance. The insurance contract covers the period from January 15, 2007, through December 31, 2007. Under the terms of the contract, payment of the insurance premium is due to W on January 15, 2007, and X pays the premium to W on January 15, 2007. X uses the recurring item exception under § 1.461-5.

Section 461(a) provides that the amount of any deduction or credit must be taken for the taxable year that is the proper taxable year under the method of accounting used by the taxpayer in computing taxable income.

Section 1.461-1(a)(2)(i) of the Income Tax Regulations provides that, under an accrual method of accounting, a liability is incurred, and is generally taken into account for federal income tax purposes, in the taxable year in which (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability (the “all events test”). See also § 1.446-1(c)(1)(ii)(A).

The first prong of the all events test requires that all the events have occurred that establish the fact of the liability. Therefore, it is fundamental to the all events test that although expenses may be deductible before they become due and payable, liability first must be firmly established. United States v. General Dynamics Corp., 481 U.S. 239, 243-4 (1987).

Generally, under § 1.461-1(a)(2), all the events have occurred that establish the fact of the liability when (1) the event fixing the liability, whether that be the required performance or other event, occurs, or (2) payment therefore is due, whichever happens earliest. Rev. Rul. 80-230, 1980-2 C.B. 169; Rev. Rul. 79-410, 1979-2 C.B. 213, amplified by Rev Rul. 2003-90, 2003-2 C.B. 353. The terms of a contract are relevant in determining the events that establish the fact of a taxpayer’s liability. See, e.g., Decision, Inc. v. Commissioner, 47 T.C. 58 (1966), acq., 1967-2 C.B. 2.

Section 461(h) and § 1.461-4 provide that, for purposes of determining whether an accrual basis taxpayer can treat the amount of any liability as incurred, the all events test is not treated as met any earlier than the taxable year in which economic performance occurs with respect to the liability.

Section 1.461-4(d)(2) provides that if a liability of a taxpayer arises out of the providing of services or property to the taxpayer by another person, economic performance occurs as the services or property is provided.

Section 1.461-4(g)(5) provides that if a liability of a taxpayer arises out of the provision to the taxpayer of insurance, economic performance occurs as payment is made to the person to which the liability is owed.

Section 1.461-5(b)(1) provides a recurring item exception to the general rule of economic performance. Under the recurring item exception, a liability is treated as incurred for a taxable year if: (i) at the end of the taxable year, all events have occurred that establish the fact of the liability and the amount can be determined with reasonable accuracy; (ii) economic performance occurs on or before the earlier of (a) the date that the taxpayer files a return (including extensions) for the taxable year, or (b) the 15th day of the ninth calendar month after the close of the taxable year; (iii) the liability is recurring in nature; and (iv) either the amount of the liability is not material or accrual of the liability in the taxable year results in better matching of the liability against the income to which it relates than would result from accrual of the liability in the taxable year in which economic performance occurs.

Situation 1. In Situation 1, the first event that occurs to establish the fact of X’s liability for services is that payment is due under the contract on January 15, 2007. See Rev. Rul. 80-230; Rev. Rul. 79-410. Thus, for purposes of § 461, the fact of the liability is established on January 15, 2007. At that time, the amount can be determined with reasonable accuracy. Economic performance with respect to the liability occurs as the services are provided, from January 15, 2007, through January 31, 2007. See § 1.461-4(d)(2). Therefore, X incurs a liability for services in 2007.

The fact of the liability is not established in 2006, even though X executed the service contract on December 15, 2006. It is well established that an accrual basis obligor is not permitted to deduct an expense stemming from a bilateral contractual arrangement, that is, mutual promises, prior to the performance of the contracted for services by the obligee. Rev. Rul. 80-182, 1980-2 C.B. 167, citing Levin v. Commissioner, 21 T.C. 996 (1954), aff’d, 219 F.2d 588 (3d Cir. 1955) (an agreement for services to be performed in the next year did not establish the fact of the taxpayer’s liability but was simply an agreement under which a liability would be incurred in the future) and Amalgamated Housing Corp. v. Commissioner, 37 B.T.A. 817 (1938), aff’d per curium, 108 F.2d 1010 (2d Cir. 1940) (an agreement to renovate property in the future did not establish the fact of the taxpayer’s liability; the accrual was for services in renovating, not the duty to renovate). Thus, the mere execution of the contract by X in 2006 is not sufficient, by itself, to establish the fact of the liability. Further, the recurring item exception does not apply because the fact of the liability is not established in 2006.

Situation 2. In Situation 2, the first event that occurs to establish the fact of X’s liability for insurance is that the premium is due under the contract. See Rev. Rul. 80-230; Rev. Rul. 79-410. Thus, for purposes of § 461, the fact of the liability is established on January 15, 2007. At that time, the amount can be determined with reasonable accuracy. Economic performance with respect to the liability occurs as payment is made, on January 15, 2007. See § 1.461-4(g)(5). Therefore, X incurs a liability for insurance in 2007.

The fact of the liability is not established in 2006, even though X executed the insurance contract on December 15, 2006. See Rev. Rul. 80-182. Although federal or state regulations may impose certain legal obligations on taxpayers, those obligations, without more, do not necessarily establish the fact of a taxpayer’s liability under § 461. See Chrysler Corp. v. Commissioner, 436 F.3d 644 (6th Cir. 2006) (statutory obligation related to warranty obligation was not sufficient to establish the fact of the taxpayer’s liability to provide warranty services). Further, the recurring item exception does not apply because the fact of the liability is not established in 2006.

(1) Under § 461, all the events have occurred that establish the fact of the liability for services provided to the taxpayer when (1) the event fixing the liability, whether that be the required performance or other event, occurs, or (2) payment is due, whichever happens earliest. The mere execution of a contract, without more, does not establish the fact of a taxpayer’s liability for services.

(2) Under § 461, all the events have occurred that establish the fact of the liability for insurance when (1) the event fixing the liability, whether that be the required performance or other event, occurs, or (2) payment is due, whichever happens earliest. The mere execution of a contract, without more, does not establish the fact of a taxpayer’s liability for insurance.

A change in the treatment of liabilities for services or insurance to comply with this revenue ruling is a change in method of accounting within the meaning of §§ 446 and 481 and the regulations issued thereunder. Accordingly, a taxpayer that wants to change its treatment of liabilities for services or insurance to comply with this revenue ruling must obtain the consent of the Commissioner under § 446(e) and § 1.446-1(e)(2)(i) by following the procedures in Rev. Proc. 2007-14, page , this Bulletin.

The principal author of this revenue ruling is Leta A. Ayres of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Ms. Ayres at (202) 622-5020 (not a toll-free call).

This revenue ruling provides the dollar amounts, increased by the 2007 inflation adjustment, for § 1274A of the Internal Revenue Code. This ruling also provides that the Internal Revenue Service will no longer publish the inflation adjustment under § 7872(g)(2) because of amendments made to § 7872 by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), Pub. L. No. 109-222, 120 Stat. 345, and the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 120 Stat. 2922.

In general, §§ 483 and 1274 determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. In addition, any interest on a debt instrument subject to § 1274 is taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and 1274 for certain types of debt instruments.

In the case of a “qualified debt instrument,” the discount rate used for purposes of §§ 483 and 1274 may not exceed 9 percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new § 38 property within the meaning of § 48(b), as in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c), the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, § 1274 does not apply, and interest on the instrument is accounted for by both the borrower and the lender under the cash method of accounting. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) In the case of instruments arising out of sales or exchanges before January 1, 1990, the stated principal amount does not exceed $2,000,000; (B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (C) § 1274 would have applied to the debt instrument but for an election under § 1274A(c); and (D) an election under § 1274A(c) is jointly made with respect to the debt instrument by the borrower and lender. Section 1.1274A-1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

Section 1274A(d)(2) provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B) defines the CPI for any calendar year as the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

For debt instruments arising out of sales or exchanges after December 31, 1989, the inflation-adjusted amounts under § 1274A are shown in Table 1.

The Service will no longer publish the inflation adjustment under § 7872(g)(2), regarding the amount that a taxpayer may lend to a qualifying continuing care facility without incurring imputed interest, because of amendments made to § 7872 by TIPRA and the Tax Relief and Health Care Act of 2006.

Section 7872(g)(2) provides an exception for certain below-market loans to qualified continuing care facilities only to the extent that the aggregate outstanding amount of any loan to which § 7872(g)(1) applies (determined without regard to § 7872(g)(2)), when added to the aggregate outstanding amount of all other previous loans between the lender (or the lender’s spouse) and any qualified continuing care facility to which § 7872(g)(1) applies, does not exceed $90,000. Section 7872(g)(5) generally provides that, for loans made during any calendar year after 1986 to which § 7872(g)(1) applies, the $90,000 limit specified in § 7872(g)(2) is increased by an inflation adjustment.

Section 7872(g)(6) generally suspends the application of § 7872(g) for any calendar year to which § 7872(h), as amended by TIPRA, applies. Section 7872(h) generally provides that § 7872 shall not apply for any calendar year to any below-market loan owed by a facility which on the last day of such year is a qualified continuing care facility, if such loan was made pursuant to a continuing care contract and if the lender (or the lender’s spouse) attains age 62 before the close of such year. Section 7872(h)(4) provided that paragraph (h) shall not apply for any calendar year after 2010. Section 425 of the Tax Relief and Health Care Act of 2006 amended § 7872(h) by striking subsection (4), making the § 7872(h) exception for loans to qualified continuing care facilities permanent.

Rev. Rul. 2005-76, 2005-2 C.B. 1072, is supplemented and superseded.

The author of this revenue ruling is Richard C. LaFalce of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, please contact Mr. LaFalce at (202) 622-3930 (not a toll-free call).

This notice announces that Treasury and the Internal Revenue Service (IRS) will amend § 301.7701-2(b)(8) of the Procedure and Administration Regulations to add the Bulgarian aktsionerno druzhestvo entity to the list of entities that are always treated as corporations under section 7701 of the Internal Revenue Code (Code).

The IRS and Treasury issued final regulations concerning the classification of business entities under section 7701 of the Code on December 18, 1996 (check-the-box regulations). See generally, T.D. 8697, 1997-1 C.B. 215 [61 FR 66584] and §§ 301.7701-1 through 3. Under the check-the-box regulations, a business entity generally can elect its classification for federal tax purposes. However, § 301.7701-2(b)(8) provides a list of certain foreign business entities that are always classified as corporations for federal tax purposes (the per se corporation list).

On December 16, 2005, the IRS and Treasury published regulations (T.D. 9235, 2006-4 I.R.B. 338 [70 FR 74658]) under section 7701 of the Code adding certain foreign business entities to the per se list of corporations. These regulations were in response to the adoption by the Council of the European Union of a Council Regulation (2157/2001 2001 O.J. (L 294)) (the EU Regulation) that recognized a new business entity, the European public limited liability company (Societas Europaea or SE).

The SE is a public limited liability company. The EU Regulation provides general rules that govern the formation and operation of an SE, and supplements those rules for specified issues and issues it does not otherwise address by reference to the laws with respect to public limited liability companies for the country in which the SE has its registered office. An SE must have a registered office in one of the Member States of the European Economic Area (which includes all Member States of the European Union plus Norway, Iceland, and Liechtenstein). For further background see T.D. 9197, 2005-1 C.B. 985 [70 FR 19697] and Notice 2004-68, 2004-2 C.B. 706.

As of January 1, 2007, Bulgaria will become a member of the European Union. Accordingly, an SE will be eligible to have its registered office in Bulgaria and those SEs with a registered office in Bulgaria will, to a certain extent, be subject to the laws of the public limited liability company in Bulgaria. As a result, and consistent with T.D. 9235, it is appropriate for the IRS and Treasury to add the public limited liability company for Bulgaria to the per se list.

The IRS and Treasury will issue temporary and proposed regulations that will modify § 301.7701-2 to include the Bulgarian aktsionerno druzhestvo on the per se corporation list. This entity has been identified as the public limited liability company in Bulgaria.

The temporary and proposed regulations to be issued adding the Bulgarian aktsionerno druzhestvo to § 301.7701-2(b)(8) generally will apply to such entities formed on or after January 1, 2007. However, they shall also apply to an entity formed before such date upon a 50 percent or greater change of ownership subsequent to such date.

The principal author of this notice is Ronald M. Gootzeit of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Ronald M. Gootzeit at (202) 622-3860 (not a toll-free call).

This revenue procedure supersedes Rev. Proc. 98-20, 98-1 C.B. 549, and sets forth the acceptable form of the written assurances (certification) that a real estate reporting person must obtain from the seller of a principal residence to except the sale or exchange of such principal residence from the information reporting requirements for real estate transactions under § 6045(e)(5) of the Internal Revenue Code (Code). This revenue procedure incorporates amendments to section 121 of the Code made by section 840 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (October 22, 2004) (AJCA), as amended by section 403(ee) of the Gulf Opportunity Zone Act of 2005, Pub. L. No. 109-135, 119 Stat. 2631 (December 21, 2005) (the GO Zone Act).

.01 Section 6045(e) and § 1.6045-4 of the Income Tax Regulations generally require a real estate reporting person (as defined in § 6045(e)(2) and § 1.6045-4(e)) to file an information return regarding a real estate transaction and to furnish a payee statement to the seller regarding that transaction. The information return and statement must include the name, address, and taxpayer identification number (TIN) of the seller, and the gross proceeds of the real estate transaction. This information is reported on Form 1099-S, Proceeds From Real Estate Transactions.

.02 Section 312 of the Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. No. 105-34, 111 Stat. 788 (August 5, 1997), as amended by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 805 (July 22, 1998), effective for sales or exchanges after May 6, 1997, amended § 6045(e) by adding a new paragraph (5), which excepts a sale or exchange of a principal residence from the § 6045(e) information reporting requirements if the seller provides the real estate reporting person with a certification setting forth certain written assurances, including an assurance that the residence is the seller’s principal residence (within the meaning of § 121) and an assurance that the full amount of the gain on the sale or exchange of the principal residence is excludable from gross income under § 121.

.03 Section 312 of TRA 1997 also amended § 121 to provide new rules for the exclusion of gain on certain sales or exchanges of a principal residence. Section 121, as amended, provides that a taxpayer may exclude from gross income up to $250,000 of gain on the sale or exchange of a principal residence if certain conditions are met. In certain circumstances, a married individual filing a joint return for the taxable year of the sale or exchange may exclude from gross income up to $500,000 of gain. This exclusion also applies to the sale or exchange of stock held by a tenant-stockholder in a cooperative housing corporation (as defined in § 216) and may apply to the sale or exchange of a remainder interest in a principal residence if the taxpayer so elects. See Code §§ 121(d)(4) and (d)(8).

.04 Section 840 of the AJCA, as amended by the GO Zone Act, amended § 121 to provide that the exclusion for gain on the sale or exchange of a principal residence does not apply if the principal residence was acquired by the taxpayer in a like-kind exchange in which any gain was not recognized under § 1031(a) or (b) within the prior five years.

This revenue procedure applies to the information reporting requirements under § 6045(e) for a sale or exchange of a principal residence.

.01 To be excepted from the information reporting requirements in § 6045(e) on the sale or exchange of a principal residence (including stock in a cooperative housing corporation), the real estate reporting person must obtain from the seller a written certification, signed by the seller under penalties of perjury, that assurances (1) through (6) set forth in section 4.02 of this revenue procedure are true (or, in the case of assurance (6), not applicable). For purposes of this certification, the term “seller” includes each owner of the residence that is sold or exchanged. Thus, if a residence has more than one owner, a real estate reporting person must either obtain a certification from each owner (whether married or not) or file an information return and furnish a payee statement for any owner that does not make the certification.

.02 The assurances are:

(1) The seller owned and used the residence as the seller’s principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.

(2) The seller has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.

(3) No portion of the residence has been used for business or rental purposes after May 6, 1997, by the seller (or by the seller’s spouse or former spouse, if the seller was married at any time after May 6, 1997).

(4) At least one of the following three statements applies:

The sale or exchange is of the entire residence for $250,000 or less.

OR

The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange of the entire residence is $250,000 or less.

OR

The seller is married, the sale or exchange is of the entire residence for $500,000 or less, and (a) the seller intends to file a joint return for the year of the sale or exchange, (b) the seller’s spouse also used the residence as his or her principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence, and (c) the seller’s spouse also has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence.

(5) During the 5-year period ending on the date of the sale or exchange of the residence, the seller did not acquire the residence in an exchange to which section 1031 applied.

(6) In cases where the seller’s basis in the residence is determined by reference to the basis in the hands of a person who acquired the residence in an exchange to which section 1031 applied, the exchange to which section 1031 applied occurred more than 5 years prior to the date of the seller’s sale or exchange of the residence.

A sample certification form that may be used by a real estate reporting person to obtain the applicable assurances from the seller is provided in the Appendix of this revenue procedure. Use of this sample certification form is not required. The requirements of the certification under § 6045(e)(5) will be met if the content and wording of a written certification provide the same information as required by section 4 of this revenue procedure.

The real estate reporting person may obtain a certification at any time on or before January 31 of the year following the year of the sale or exchange of the residence. The certification must be retained by the real estate reporting person for 4 years after the year of the sale or exchange of the residence to which the certification applies.

A real estate reporting person who relies on a certification made in compliance with this revenue procedure will not be liable for the penalties under § 6721 for failure to file an information return, or under § 6722 for failure to furnish a payee statement to the seller, unless the real estate reporting person has actual knowledge that any assurance is incorrect.

Rev. Proc. 98-20 is superseded.

This revenue procedure is effective for sales or exchanges of a principal residence occurring after January 22, 2007.

The collections of information contained in this revenue procedure have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1592.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this revenue procedure is in section 4 and 5 of this revenue procedure. This information is required to exempt a real estate reporting person from the requirement to file an information return and furnish a payee statement reporting the sale or exchange of a principal residence. The likely respondents are individual taxpayers who sell or exchange a principal residence and real estate businesses.

The estimated total annual reporting burden for respondents is 383,000 hours.

The estimated burden per respondent is 10 minutes. The estimated number of respondents is 2,300,000. The frequency of responses is on occasion.

The estimated total annual burden for recordkeepers is 37,500 hours.

The estimated annual burden per recordkeeper is 25 minutes. The estimated number of recordkeepers is 90,000.

Books or records relating to a collection of information must be retained as long as their content may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103.

The principal author of this revenue procedure is Timothy S. Sheppard of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure, contact Mr. Sheppard at (202) 622-4910 (not a toll-free call).

This revenue procedure provides procedures by which a taxpayer may obtain the automatic consent of the Commissioner under § 446(e) of the Internal Revenue Code to change its method of accounting for liabilities for services or insurance to comply with Rev. Rul. 2007-3, page , this Bulletin.

.01 In Rev. Rul. 2007-3, the Internal Revenue Service addressed the issue of when a taxpayer using an accrual method of accounting incurs a liability for services or insurance under § 461. The ruling holds that a liability for services or insurance is not fixed by the mere execution of a contract for the future provision of services or insurance. Instead, all the events have occurred that establish the fact of the liability when (1) the event fixing the liability, whether that be the required performance or other event, occurs, or (2) payment is due, whichever happens earliest.

.02 Under § 446(e) and § 1.446-1(e)(2)(i) of the Income Tax Regulations, a taxpayer generally must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. To obtain the Commissioner’s consent to a change in method, § 1.446-1(e)(3)(i) generally requires a taxpayer to file Form 3115, Application for Change in Accounting Method, during the taxable year in which the taxpayer wants to make the proposed change. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures that provide the terms and conditions necessary for a taxpayer to obtain consent to change a method of accounting. The terms and conditions the Commissioner may prescribe include whether the change is to be made with a § 481(a) adjustment, and if so, the § 481(a) adjustment period, or on a cut-off basis.

.03 Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432), provides procedures under § 446(e) and § 1.446-1(e) for obtaining the automatic consent of the Commissioner to change certain methods of accounting for federal income tax purposes. Specifically, Rev. Proc. 2002-9 applies to a taxpayer requesting the Commissioner’s consent to change to a method of accounting described in the APPENDIX of that revenue procedure. Rev. Proc. 2002-9 is the exclusive procedure for a taxpayer within its scope to obtain the Commissioner’s consent. See Rev. Proc. 2002-9, sections 1 and 4.01.

This revenue procedure applies to any taxpayer that is currently treating the mere execution of a contract for services or insurance as establishing the fact of the liability under § 461 and wants to change its method of accounting for liabilities for services or insurance to comply with Rev. Rul. 2007-3.

.01 In General. A change in the treatment of liabilities for services or insurance to comply with Rev. Rul. 2007-3 is a change in method of accounting within the meaning of §§ 446 and 481 and the regulations issued thereunder. Accordingly, a taxpayer within the scope of this revenue procedure that wants to change its treatment of liabilities for services or insurance to comply with Rev. Rul. 2007-3 must obtain the consent of the Commissioner under § 446(e) and § 1.446-1(e)(3).

.02 Automatic Change. A taxpayer within the scope of this revenue procedure that wants to change its method of accounting for liabilities for services or insurance must obtain the consent of the Commissioner by following the automatic consent procedures in Rev. Proc. 2002-9 (or its successor). For purposes of section 6.02(4)(a) of Rev. Proc. 2002-9, the taxpayer must include on line 1a of the Form 3115 the designated automatic accounting method change number 106.

Rev. Proc. 2002-9 is modified and amplified to include in the APPENDIX the automatic change provided in this revenue procedure.

This revenue procedure is effective for taxable years ending on or after December 31, 2006.

The principal author of this revenue procedure is Leta A. Ayres of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure, contact Ms. Ayres at (202) 622-5020 (not a toll-free call).

This revenue procedure provides an automatic consent procedure allowing a taxpayer to make a change in method of accounting under § 446(e) of the Internal Revenue Code for depreciable or amortizable property (hereinafter referred to collectively as “depreciable property”) after its disposition. This revenue procedure also waives the application of the two-year rule set forth in Rev. Rul. 90-38, 1990-1 C.B. 57, for certain changes in depreciation or amortization (hereinafter referred to collectively as “depreciation”). This revenue procedure clarifies, modifies, amplifies, and supersedes Rev. Proc. 2004-11, 2004-1 C.B. 311. This revenue procedure also modifies Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432), and other revenue procedures to conform with § 1.446-1(e)(2)(ii)(d) of the Income Tax Regulations.

.01 Section 446(e) and § 1.446-1(e) provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner of Internal Revenue before changing a method of accounting for federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.

.02 On January 20, 2004, the Internal Revenue Service published Rev. Proc. 2004-11, which provided an automatic consent procedure allowing a taxpayer to make a change in method of accounting under § 446(e) for depreciable property after its disposition. Rev. Proc. 2004-11 also waived the application of the two-year rule set forth in Rev. Rul. 90-38 for certain changes in depreciation. In addition, Rev. Proc. 2004-11 modified Rev. Proc. 2002-9 and other revenue procedures to conform with § 1.446-1T(e)(2)(ii)(d) of the temporary Income Tax Regulations.

.03 Concurrent with the issuance of this revenue procedure, §§ 1.446-1(e)(2)(ii)(d) and 1.1016-3(h) have been promulgated. Section 1.446-1(e)(2)(ii)(d) identifies the changes in depreciation that are (and are not) considered a change in method of accounting. Section 1.1016-3(h) provides that for purposes of determining whether a change in depreciation is a change in method of accounting under § 446(e), the “allowed or allowable” rule under § 1016(a)(2) will not be considered to permanently affect a taxpayer’s lifetime income.

.04 In general, if a taxpayer uses an impermissible method of accounting in two or more consecutively filed federal tax returns the taxpayer has adopted a method of accounting. See Rev. Rul. 90-38. The Service and Treasury Department recognize that with respect to changes in depreciation this two-year rule may increase administrative and compliance costs because many taxpayers changing from an impermissible to permissible method of accounting for depreciation used the impermissible method for depreciable properties placed in service in the taxable year immediately preceding the year of change. Accordingly, in the interest of sound tax administration, the Service and Treasury have decided to waive the two-year rule in Rev. Rul. 90-38 for a change in depreciation to which § 1.446-1(e)(2)(ii)(d) applies.

.05 If depreciable property is transferred in a transaction in which the transferee is treated as the transferor for purposes of computing the depreciation allowance for the property with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted depreciable basis in the hands of the transferor (for example, in transactions subject to § 168(i)(7) or § 381(c)(6)), the transferee may file a Form 3115, Application for Change in Accounting Method, to change from an impermissible method of accounting adopted by the transferor for that portion of the basis of the property to a permissible method of accounting for depreciation for the same portion of the basis of the property, provided the impermissible method of accounting for that portion of the basis of the property has not been changed by the transferor (through filing, for example, a Form 3115 or an amended return) or by the Service upon examination of the transferor’s tax returns. In this case, the § 481 adjustment will include any necessary adjustments since the property’s placed-in-service date by the transferor.

.06 The significant changes to Rev. Proc. 2004-11 include:

.07 The significant changes to Rev. Proc. 2002-9 include:

.01 Scope.

.02 Change in method of accounting.

.03 Taxpayer or property outside scope. If a taxpayer is precluded from using section 3 of this revenue procedure because the taxpayer or the item of depreciable property is outside the scope of section 3 of this revenue procedure (for example, the item of depreciable property was not disposed of by the taxpayer), any change in method of accounting for depreciation must be made in accordance with the requirements of Rev. Proc. 97-27, 1997-1 C.B. 680 (or its successor), or Rev. Proc. 2002-9 (or its successor), as applicable.

.01 In general. If a taxpayer uses an impermissible method of determining depreciation for a depreciable property, the taxpayer adopts that method of accounting for the property when the taxpayer treats the property in the same way in determining gross income or deductions in two or more consecutively filed federal tax returns. Accordingly, the taxpayer changing from that impermissible method of accounting must file a Form 3115 in accordance with the requirements of § 1.446-1(e)(3)(i) and, as applicable, Rev. Proc. 97-27 or Rev. Proc. 2002-9. See Rev. Rul. 90-38.

.02 Waiver of two-year rule. Notwithstanding Rev. Rul. 90-38, a taxpayer may file a Form 3115 under Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, to change from an impermissible method of accounting for depreciation to a permissible method of accounting for depreciation under § 1.446-1(e)(2)(ii)(d) for any depreciable property subject to § 1.446-1(e)(2)(ii)(d) and placed in service by the taxpayer in the taxable year immediately preceding the year of change (as defined in section 5.02(2) of Rev. Proc. 97-27 or section 5.02 of Rev. Proc. 2002-9, as applicable) (hereinafter, this property is referred to as “1-year depreciable property”), provided the additional term and condition in section 4.03 of this revenue procedure is satisfied. Alternatively, the taxpayer may make the change from the impermissible depreciation method to the permissible depreciation method for the 1-year depreciable property by filing an amended federal tax return for the placed-in-service year prior to the date the taxpayer files its federal tax return for the taxable year succeeding the placed-in-service year.

.03 Additional term and condition for filing a Form 3115. In addition to the terms and conditions provided in Rev. Proc. 97-27 or Rev. Proc. 2002-9, as applicable, the § 481 adjustment reported on a Form 3115 that is filed by a taxpayer in accordance with section 4.02 of this revenue procedure to make a change in method of accounting for depreciation under § 1.446-1(e)(2)(ii)(d) for any 1-year depreciable property, must include the amount of any adjustment attributable to all property (including the 1-year depreciable property) subject to the Form 3115.

.01 Rev. Proc. 2004-11 is clarified, modified, amplified, and superseded.

.02 The heading for section 2 of the APPENDIX of Rev. Proc. 2002-9 is modified to read as follows: “SECTION 2. DEPRECIATION OR AMORTIZATION (§ 56(a)(1), 56(g)(4)(A), 167, 168, 197, 1400I, 1400L, OR 1400N(d), OR FORMER § 168)”.

.03 Rev. Proc. 2002-9 (as modified by Rev. Proc. 2004-11) is modified by deleting sections 2.01, 2.02, 2B, and 2.05 of the APPENDIX and replacing them with the text in, respectively, sections 1, 2, 3, and 4 of the APPENDIX of this revenue procedure.

.04 Section 6.03 of Rev. Proc. 2000-38, 2000-2 C.B. 310, 313, is modified by deleting “See § 1.446-1(e)(2)(ii)(b).” and replacing it with “See § 1.446-1(e)(2)(ii)(d)(3)(i).”

.05 Section 8.01 of Rev. Proc. 2000-50, 2000-2 C.B. 601, is modified to read as follows: “A change in a taxpayer’s treatment of costs paid or incurred to develop, purchase, lease, or license computer software to a method described in section 5, 6, or 7 of this revenue procedure is a change in method of accounting to which §§ 446 and 481 apply. Further, a change in useful life under the method described in section 6.01(2) of this revenue procedure is a change in method of accounting to which §§ 446 and 481 apply. Additionally, if a taxpayer is currently treating costs paid or incurred to develop computer software under section 5.01(2) of this revenue procedure in accordance with the rules provided in § 167(f)(1) and the regulations thereunder but is not currently using a useful life of 36 months, a change in useful life to 36 months is a change in method of accounting to which §§ 446 and 481 apply. See § 1.446-1(e)(2)(ii)(d)(3)(i).

.01 In general. Except as provided in sections 6.02, 6.03, and 6.04 of this revenue procedure, this revenue procedure is effective for a Form 3115 filed for taxable years ending on or after December 26, 2006.

.02 Transition rule for previously filed Forms 3115 for automatic consent.

.03 Application of section 3. Section 3 of this revenue procedure is effective for a Form 3115 filed on or after December 26, 2006.

.04 Changes made to Rev. Proc. 2000-50. The changes made in section 5.06 of this revenue procedure to section 8.01 of Rev. Proc. 2000-50 are effective for a Form 3115 filed for the taxable years ending on or after December 26, 2006, except that:

The principal author of this revenue procedure is Douglas H. Kim of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue procedure, contact Mr. Kim at (202) 622-3110 (not a toll-free call).

.01 This revenue procedure permits a taxpayer under the jurisdiction of the Large and Mid-Size Business Division to request that the Service examine specific issues relating to tax returns before those returns are filed. This revenue procedure supersedes Rev. Proc. 2005-12, 2005-1 C.B. 311. This revenue procedure provides the framework within which a taxpayer and the Service may work together in a cooperative environment to resolve, after examination, issues accepted into the program. If the taxpayer and the Service are able to resolve the examined issues before the returns that they affect are filed, this revenue procedure authorizes the taxpayer and the Service to memorialize their agreement by executing an LMSB Pre-Filing Agreement (PFA).

.02 This revenue procedure outlines the procedures for resolving issues through pre-filing examinations. Taxpayers and the Service often resolve issues more effectively and efficiently through a pre-filing examination than a post-filing examination, because the taxpayer and the Service have more timely access to the records and personnel that are relevant to the issues. A pre-filing examination also provides the taxpayer with certainty regarding the examined issue at an earlier point in time than a post-filing examination. These procedures benefit both taxpayers and the Service by improving the quality of tax compliance while reducing costs, burdens, and delays. Unlike letter rulings and other forms of written advice provided by the Offices of the Associates Chief Counsel (see Rev. Proc. 2006-1, 2006-1 I.R.B. 1), a PFA does not determine the tax treatment of prospective or future transactions or events, but only of completed transactions or events whose tax treatment has not yet been reported on a return.

.01 In Rev. Proc. 2001-22, 2001-1 C.B. 745, the Service provided procedures for LMSB taxpayers to request an examination and resolve specific issues relating to returns that were neither due (taking into account any extensions of time to file) nor filed.

.02 Because Rev. Proc. 2001-22 limited the eligible years for the PFA program to current or prior taxable years for which returns were neither due nor filed, taxpayers and the Service could not resolve issues for multiple future taxable years or issues regarding appropriate methodologies for determining tax consequences that would affect future taxable years.

.03 In Rev. Proc. 2005-12, the Service expanded the scope of the PFA program by allowing taxpayers and the Service to address certain issues over a limited number of future taxable years. In addition, the Service revised the domestic and international issues eligible for the PFA program. Section 12 of Rev. Proc. 2005-12 provided that that revenue procedure would remain in effect until December 31, 2006, unless sooner revoked, modified, or superseded.

.04 The Service has determined to renew the PFA program as described in Rev. Proc. 2005-12 with minimal changes. This revenue procedure largely continues the existing PFA program, clarifying procedures for processing a PFA request and updating the user fee requirements for a PFA. The objective of the PFA program remains to resolve, before returns are filed, issues that are likely to be disputed in post-filing audits.

.01 At any time prior to the execution of the PFA, either the taxpayer or the Service may withdraw from consideration all or part of the request for a PFA. The withdrawal must be in writing and signed by the party initiating the withdrawal, i.e., the taxpayer or his authorized representative or the Industry Director, Director Field Operations, or the Director Field Specialists.

.02 Notwithstanding the withdrawal by either the taxpayer or the Service of any or all the issues that are the subject of the request for a PFA, the taxpayer’s agreement under section 4.04 of this revenue procedure will remain in effect.

PFAs are agreements described in section 6103(b)(2)(D). A PFA and the information generated or received by the Service during the PFA process constitute confidential return information. As required by the Conference Report to H.R. 4577, The Community Renewal Tax Relief Act of 2000 (Pub. L. 106-554), H.R. Conf. Rep. No. 1033, 106th Cong., 2d Sess. 1033 (2000), the Service will, consistent with the restrictions of section 6103, continue to publish annual reports summarizing the operation of the PFA program. PFAs are not written determinations under section 6110 and, accordingly, are exempt from disclosure to the public under the Freedom of Information Act.

This revenue procedure is effective on December 26, 2006. This revenue procedure will remain in effect until December 31, 2008, unless sooner revoked, modified, or superseded. A request for a PFA that has been accepted into the program under section 5 of this revenue procedure will remain subject to the provisions of this revenue procedure, notwithstanding the preceding sentence.

Rev. Proc. 2005-12, 2005-1 C.B. 311, is superseded.

.01 No aspect of the PFA process will affect the record-keeping requirements imposed by any section of the Internal Revenue Code.

.02 The taxpayer must maintain a copy of the PFA supporting documents and books of account and records to enable the Service to ensure the taxpayer’s compliance with the PFA. These records may be specified in the PFA itself or in separate agreements.

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507) under the control number 1545-1684.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid OMB control number. The collections of information in this revenue procedure are in sections 4, 6, and 14. The information collected under section 4 is required to provide the Service with the information necessary to determine which taxpayers should be included in the PFA program. The information collected under section 6 will be used to resolve the taxpayer’s issue and to support any PFA entered into between the taxpayer and the Service. The record-keeping requirements under section 14 will be used for tax administration. The collections of information under sections 4 and 6 are voluntary. Once a PFA is entered into, the record-keeping requirements under section 14 are mandatory. The likely respondents are businesses or other for-profit institutions.

The estimated total annual reporting and/or record-keeping burden is 13,134 hours.

The estimated annual burden per respondent varies from 5 hours to 1,092 hours, depending on whether a taxpayer applying to the PFA program is accepted into the program. The estimated annual burden per respondent for taxpayers who apply to the PFA program and are accepted is 1,092 hours. The estimated annual burden per respondent for taxpayers who apply to the PFA program and are not accepted is 5 hours. The estimated number of taxpayers who apply to the PFA program and are accepted is 12. The estimated number of taxpayers who apply to the PFA program and are not accepted is 6. The estimated total number of applicants and/or recordkeepers is 18.

The estimated annual frequency of responses is on occasion.

Books or records relating to a collection of information must be retained so long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The principal author of this revenue procedure is Stuart Spielman of the Office of Associate Chief Counsel (Procedure & Administration). For further information about this revenue procedure, contact Melanie Perrin, Senior Program Analyst, LMSB Office of Pre-Filing and Technical Guidance, at (202) 283-8408 (voice) (not a toll-free call), (202) 283-8406 (fax) (not a toll-free call).

The names of organizations that no longer qualify as organizations described in section 170(c)(2) of the Internal Revenue Code of 1986 are listed below.

Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on January 22, 2007, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Internal Revenue Service (IRS), Treasury.

Change of location of public hearing.

On October 19, 2006, on page 61692 of the Federal Register (71 FR 61692), a notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing (REG-127819-06, 2006-48 I.R.B. 1013) announced that a public hearing concerning the application of section 199, which provides a deduction for income attributable to domestic production activities will be held February 5, 2007 in the auditorium of the New Carrollton Federal Building, 5000 Ellin Road, Lanham, MD 20706. The location of the public hearing has changed.

The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly Banks, (202) 622-0392 (not a toll-free number).

Internal Revenue Service (IRS), Treasury.

Change of location of public hearing.

On October 19, 2006, on page 61693 of the Federal Register (71 FR 61693), a notice of proposed rulemaking and notice of public hearing (REG-136806-06, 2006-47 I.R.B. 950) announced that a public hearing concerning applying the private security or payment test for State and local governmental issuers of tax-exempt bonds will be held February 13, 2007 in the auditorium of the New Carrollton Federal Building, 5000 Ellin Road, Lanham, MD 20706. The location of the public hearing has changed.

The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly Banks, (202) 622-0392 (not a toll-free number).

Internal Revenue Service (IRS), Treasury.

Change of location of public hearing.

On October 18, 2006, on page 61693 of the Federal Register (71 FR 61441), a notice of proposed rulemaking and notice of public hearing (REG-141901-05, 2006-47 I.R.B. 947) announced that a public hearing concerning guidance on the taxation of the exchange of property for an annuity contract will be held February 16, 2007 in the auditorium of the New Carrollton Federal Building, 5000 Ellin Road, Lanham, MD 20706. The location of the public hearing has changed.

The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Kelly Banks, (202) 622-0392 (not a toll-free number).