[Federal Register: September 4, 2003 (Volume 68, Number 171)]
[Rules and Regulations]
[Page 52496-52508]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se03-6]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9090]
RIN 1545-BC31
Limitation on Use of the Nonaccrual-Experience Method of
Accounting Under Section 448(d)(5)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document revises temporary income tax regulations to
provide guidance regarding the use of a nonaccrual-experience method of
accounting by taxpayers using an accrual method of accounting and
performing services. The revisions reflect changes to section 448(d)(5)
of the Internal Revenue Code by the Job Creation and Worker Assistance
Act of 2002. The revised temporary regulations will affect taxpayers
that no longer qualify to use a nonaccrual-experience method of
accounting, and qualifying taxpayers that wish to adopt or change a
nonaccrual-experience method of accounting. The text of these temporary
regulations also serves as the text of the proposed regulations set
forth in the Proposed Rules section of this issue of the Federal
Register.
Effective Date:
These regulations are effective September 4, 2003.
Applicability Date: These regulations are applicable for taxable
years ending after March 9, 2002.
FOR FURTHER INFORMATION CONTACT: Terrance McWhorter, (202) 622-4970
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collection of information contained in these
regulations has been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget under
control number 1545-1855. Responses to this collection of information
are mandatory.
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 control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Books and records relating to a collection of information must be
retained as 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.
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 448(d)(5). Section 448(d)(5) was added to the
Code by section 801 of the Tax Reform Act of 1986 (Public Law 99-514,
100 Stat. 2085) and was amended by section 403 of the Job Creation and
Worker Assistance Act of 2002 (Public Law 107-147, 116 Stat. 21) (the
2002 Act), effective for taxable years ending after March 9, 2002.
These regulations pertain to the nonaccrual of certain amounts by
taxpayers using an accrual method of accounting and performing
services.
Explanation of Provisions
Background
Prior to being amended by the 2002 Act, pursuant to section
448(d)(5) taxpayers using an accrual method of accounting and
performing services were not required to accrue any portion of their
service-related income that, on the basis of their experience, would
not be collected. Temporary regulations under section 448(d)(5) (former
temporary regulations) provided rules for the nonaccrual of certain
amounts by service providers, including the use of experience to
estimate uncollectible amounts and the mechanics of the nonaccrual-
experience method.
Section 448(d)(5) was amended by section 403 of the 2002 Act,
effective for taxable years ending after March 9, 2002. Section
448(d)(5) now provides that a nonaccrual-experience method is available
only for taxpayers using an accrual method who either provide services
in fields described in section 448(d)(2)(A) (i.e., health, law,
engineering, architecture, accounting, actuarial science, performing
arts, or consulting), or that meet the $5 million annual gross receipts
test of section 448(c) for all prior taxable years.
The legislative history of the 2002 Act states that Congress
believed that for many qualified service providers the formula
contained in the former temporary regulations under section 448(d)(5)
may not clearly reflect the amount of income that, based on experience,
will not be collected. See H.R. Rep. No. 107-251. Congress noted that
service providers were particularly disadvantaged by the formula
contained in the former temporary regulations if significant time
elapsed between the time the services were rendered and the time a
final determination was made that the account would not be collected.
Additionally, Congress noted that taxpayers qualified to use the
nonaccrual-experience method of accounting should not be subject to a
formula that required the payment of taxes on receivables that would
not be collected.
The amendments to section 448(d)(5) made by the 2002 Act require
the Secretary to promulgate regulations. Specifically, the Secretary is
required to prescribe regulations to permit a taxpayer to use
computations or formulas that, based on experience, accurately reflect
the amount of income that will not be collected. Section 448(d)(5), as
amended, also permits a taxpayer to adopt, or request consent of the
Secretary to change to, a computation or formula that clearly reflects
the taxpayer's experience. Section 448(d)(5) further requires the
Secretary to approve a request to change to a computation or formula
that clearly reflects the taxpayer's experience. Lastly, the
legislative history to the 2002 Act states that Congress anticipated
that the Secretary would consider providing
[[Page 52497]]
safe harbors in such regulations that may be relied upon by taxpayers.
In accordance with the amendments to section 448(d)(5) in the 2002
Act, the IRS issued Notice 2003-12 (2003-6 I.R.B. 422) to provide
interim guidance under section 448(d)(5), as amended, pending the
issuance of new regulations. The interim guidance provided by Notice
2003-12 included: (1) For taxpayers that no longer qualified to use a
nonaccrual-experience method, procedures to change their method of
accounting; (2) for taxpayers that qualified to use a nonaccrual-
experience method, two safe harbor nonaccrual-experience methods that
were presumed to clearly reflect the taxpayer's nonaccrual-experience;
(3) for taxpayers that qualified to use a nonaccrual-experience method
but wished to compute their nonaccrual-experience using a formula other
than the two safe harbors provided, the requirements necessary to use
an alternative formula to compute their nonaccrual-experience; and (4)
for taxpayers that wished to change to a different nonaccrual-
experience method, the procedures necessary to obtain automatic consent
of the Commissioner to change to one of the safe harbor nonaccrual-
experience methods or to an alternative nonaccrual-experience method
that clearly reflected their experience.
The guidance provided in Notice 2003-12 has, for the most part,
been incorporated as part of these temporary regulations. However,
certain provisions in the Notice have been modified to address certain
concerns raised by the commentators.
Charging of Interest
Section 448(d)(5) and the former temporary regulations provide that
a nonaccrual-experience method of accounting may not be used with
respect to amounts due for which interest is required to be paid or for
which there is any penalty for failure to timely pay any amounts due
(other than, in certain circumstances, discounts offered for early
payment of an amount due). One commentator suggested that a taxpayer
should not be precluded from using a nonaccrual-experience method of
accounting if the taxpayer's agreement contains a provision stating
that interest is required to be paid but the taxpayer rarely enforces
the provision. The IRS and Treasury Department continue to believe that
if a taxpayer's agreement requires interest to be paid, or provides for
any penalty for failure to timely pay any amounts due, such taxpayer is
precluded from using the nonaccrual-experience method of accounting,
regardless of whether the taxpayer actually imposes such interest or
penalty.
Safe Harbor Methods
The temporary regulations include the two safe harbor nonaccrual-
experience methods that were included in Notice 2003-12. The first safe
harbor method (safe harbor 1) is the method provided in former Temp.
Reg. Sec. 1.448-2T(e)(2). The second safe harbor method (safe harbor
2) is the actual experience method that may be computed using a three-
year moving average beginning in the first taxable year this safe
harbor method is used or, for taxpayers that do not have the
information necessary to compute a three-year moving average in the
first taxable year this method is used, the option of creating a three-
year moving average beginning with the first taxable year that the
taxpayer uses this safe harbor method. A newly formed taxpayer choosing
the option of creating a three-year moving average that does not have
any accounts receivable upon formation will not be able to exclude any
portion of its year-end accounts receivable from income for its first
taxable year because the taxpayer does not have any accounts receivable
on the first day of the taxable year to track. Thus, a newly formed
taxpayer that does not have any accounts receivable upon formation must
begin creating its three-year moving average in its second taxable
year.
Commentators requested that the IRS and Treasury Department
consider other suggested alternative safe harbor methods for inclusion
in the temporary regulations. The IRS and Treasury Department analyzed
alternative methods and, based on this analysis, have determined that
two other formulas will clearly reflect a taxpayer's nonaccrual-
experience. As a result, the temporary regulations provide two
additional safe harbor nonaccrual-experience methods that may be relied
on by taxpayers as clearly reflecting their nonaccrual-experience.
The third safe harbor method (safe harbor 3) is a variation of the
formula addressed in Black Motor Co. v. Commissioner, 41 B.T.A. 300
(1940), aff'd, 125 F.2d 977 (6th Cir. 1942). The nonaccrual-experience
amount is computed by first determining the ratio of total bad debts
charged off (adjusted for recoveries) for the current taxable year and
the five preceding taxable years as compared to the total accounts
receivable at the end of the current taxable year and the five
preceding taxable years. This ratio is applied against the accounts
receivable balance at the end of the current taxable year, and the
resulting amount is then reduced by the credit charges (accounts
receivable) generated and written off during the current taxable year,
which results in the nonaccrual-experience amount for the current
taxable year.
The fourth safe harbor method (safe harbor 4) is computed by first
determining the ratio of total bad debts charged off (adjusted for
recoveries) for the current taxable year and the five preceding taxable
years other than the credit charges (accounts receivable) that were
charged off in the same taxable year they were generated as compared to
the total accounts receivable at the end of the current taxable year
and the five preceding taxable years. This ratio is then applied
against the accounts receivable balance at the end of the current
taxable year, which results in the nonaccrual-experience amount for the
current taxable year.
Commentators suggested that the IRS and Treasury Department permit
the formula addressed in Black Motor (``Black Motor formula'') as an
additional safe harbor formula in the temporary regulations. The IRS
and Treasury Department have analyzed the Black Motor formula and have
determined that the formula should not be provided as an additional
safe harbor formula because the formula only produces an accurate
reflection of a taxpayer's experience in limited circumstances. The IRS
and Treasury Department believe that safe harbors 3 and 4 (discussed
above), which are modifications of the Black Motor formula, remedy many
of the shortcomings of the Black Motor formula and, as a result, safe
harbors 3 and 4 have been included in the temporary regulations as
additional safe harbor formulas.
The IRS and Treasury Department request comments on these safe-
harbor nonaccrual-experience methods and suggestions on any additional
safe harbor methods that will clearly reflect a taxpayer's experience.
Specifically, the IRS and Treasury Department request comments on any
additional modification to the Black Motor formula that will result in
an accurate reflection of a taxpayer's experience.
Self-Testing of Any Alternative Method
Notice 2003-12 also allowed a taxpayer to use any alternative
nonaccrual-experience method that clearly reflected the taxpayer's
actual nonaccrual-experience, provided the taxpayer's alternative
nonaccrual-experience method was ``self-tested'' in the first taxable
year ending after March 9, 2002, in which the taxpayer uses the
alternative nonaccrual-experience
[[Page 52498]]
method and every three taxable years thereafter. The Notice provided
that if the taxpayer's total alternative nonaccrual-experience amount
for the test period was less than or equal to the total adjusted
nonaccrual-experience amount (actual nonaccrual-experience amount
multiplied by 105%) for the test period, then the taxpayer's
alternative nonaccrual-experience method would be treated as clearly
reflecting its nonaccrual-experience for the test period and the
taxpayer would be permitted to continue using the alternative
nonaccrual-experience method, subject to self-testing again in three
taxable years. However, if the taxpayer's total alternative nonaccrual-
experience amount for the test period was greater than the total
adjusted nonaccrual-experience amount for the test period, the Notice
stated that the taxpayer's alternative nonaccrual-experience method
would be treated as not clearly reflecting its nonaccrual-experience
for the test period and the taxpayer was required to change its
nonaccrual-experience method of accounting to a method that would
clearly reflect its nonaccrual experience.
Some commentators suggested that the self-testing requirement in
Notice 2003-12 should not be included in the regulations. They
suggested that the self-testing requirement is inconsistent with the
language and purpose of the amendments made by the 2002 Act. The
commentators also suggested that it would be burdensome and impractical
for many taxpayers using an alternative nonaccrual-experience method to
conduct the self-test due to the limitations of their existing
automated record keeping systems. Finally, one commentator suggested
that if a taxpayer's alternative nonaccrual-experience method fails the
self-testing requirements, then the temporary regulations should limit
the taxpayer's exclusion under section 448(d)(5) to the taxpayer's
adjusted nonaccrual-experience amount, rather than require the taxpayer
to change its method of accounting.
The IRS and Treasury Department believe that the self-testing
requirement is consistent with the 2002 Act, which provides that ``[a]
taxpayer may adopt, or * * * change to, a computation or formula that
clearly reflects the taxpayer's experience,'' and that ``[a] request
[to change] shall be approved if such computation or formula clearly
reflects the taxpayer's experience.'' Public Law 107-147, Sec. 403(a).
The IRS and Treasury Department believe that self-testing is necessary
for taxpayers that do not use one of the four safe harbor methods
provided to ensure that the statutory requirement that the taxpayer's
formula or computation accurately reflect the taxpayer's nonaccrual
experience is met. Therefore, the temporary regulations continue to
permit a taxpayer to use any alternative nonaccrual-experience method,
provided such method meets the self-testing requirements described in
the temporary regulations. The IRS and Treasury Department welcome
comments from taxpayers and practitioners specifically addressing the
limitations of their record keeping systems that affect conducting
self-testing, and ways in which the burden on taxpayers of self-testing
might be reduced without compromising the statute's requirement that
the taxpayer's method clearly reflect the taxpayer's experience.
Under the temporary regulations, taxpayers using (or desiring to
use) an alternative nonaccrual-experience method must self-test the
method in the first taxable year ending after March 9, 2002, that the
taxpayer uses, or desires to use, the method (first-year self-test),
and every three taxable years thereafter (three-year self-test). When
conducting the first-year self-test, a taxpayer is permitted to test
its alternative nonaccrual-experience method against any of the four
safe harbor methods. If a taxpayer is permitted to use its alternative
nonaccrual-experience method as a result of satisfying the first year
self-test, the temporary regulations require the taxpayer to include
contemporaneous documentation in its books and records stating which
safe harbor method was used during the self-test that permitted the
taxpayer to use its alternative nonaccrual-experience method. When
conducting any three-year self-test, the taxpayer must self-test its
alternative nonaccrual-experience method against the same safe harbor
method used during the immediately preceding self-test. The temporary
regulations also provide rules for taxpayers that want to change the
safe harbor method used to test their alternative nonaccrual-experience
method.
For purposes of the first-year self-test, if the alternative
nonaccrual-experience amount for the first-year self-test is less than
or equal to the nonaccrual-experience amount computed under the safe
harbor formula selected by the taxpayer for the first-year self-test,
then the taxpayer's alternative nonaccrual-experience method will be
treated as clearly reflecting its nonaccrual-experience for the test
period and the taxpayer may continue to use that alternative
nonaccrual-experience method, subject to a requirement to self-test
again after three taxable years. If the alternative nonaccrual-
experience amount is greater than the nonaccrual-experience amount of
the safe harbor method selected by the taxpayer for its self-test
method, then the taxpayer's alternative nonaccrual-experience method
will be treated as not clearly reflecting its nonaccrual-experience for
such taxable year and the taxpayer will not be permitted to use that
alternative nonaccrual-experience method for such taxable year. The
taxpayer is permitted, however, to adopt (or change to) a safe harbor
nonaccrual-experience method provided in the regulations or another
alternative nonaccrual-experience method, subject to the first-year
self-test requirement.
For purposes of the three-year self-test requirement, if the
cumulative alternative nonaccrual-experience amount for the test period
is less than or equal to the cumulative nonaccrual-experience amount
(computed by using for each taxable year of the test period the safe
harbor formula used, and contemporaneously documented, during the
immediately preceding self-test) (cumulative safe harbor nonaccrual-
experience amount), then the taxpayer's alternative nonaccrual-
experience method will be treated as clearly reflecting its nonaccrual
experience for the test period and the taxpayer may continue to use
that alternative nonaccrual-experience method, subject to a requirement
to self-test again in three taxable years. If the cumulative
alternative nonaccrual-experience amount for the test period is greater
than the cumulative safe harbor nonaccrual-experience amount, then the
taxpayer's alternative nonaccrual-experience amount will be limited to
the cumulative safe harbor nonaccrual-experience amount for the test
period. Any excess of the taxpayer's cumulative alternative nonaccrual-
experience amount excluded from income during the test period over the
taxpayer's cumulative safe harbor nonaccrual-experience amount must be
recaptured into income in the third taxable year of the three-year
self-test. The taxpayer may continue to use its alternative nonaccrual-
experience method, subject to the three-year self-test requirement.
The IRS and Treasury Department request comments on the first-year
self-test, three-year self-test, and recapture provisions of the
temporary regulations.
Special Rules
Notice 2003-12 provided that a taxpayer that did not maintain
records of the data necessary to determine its actual nonaccrual-
experience would be subject to being changed by the IRS on
[[Page 52499]]
examination to the specific charge-off method. One commentator noted
that a taxpayer should not be changed by the IRS to the specific
charge-off method merely because of unintentional and/or immaterial
variances between the methods permitted under these regulations and the
taxpayers' computations, which are often due to factors beyond the
taxpayer's control. Among the factors noted were inherent delays
between the time services were rendered and when actual billing occurs
(which may affect the determination of the year-end balance of accounts
receivable, especially when services are provided at the end of one
taxable year and the billing occurs a few days later in the subsequent
taxable year), and constraints of the taxpayer's computer systems that
limit the taxpayer's ability to maintain the data necessary for a
nonaccrual-experience method. For example, a taxpayer may be unable to
determine whether a particular recovery relates to an account
receivable on hand at the beginning of the taxable year. The
commentator noted that a taxpayer may therefore choose to treat all
recoveries as relating to an account receivable on hand at the
beginning of the taxable year, which under safe harbor 2, reduces the
nonaccrual-experience amount that the taxpayer would be entitled to if
the taxpayer precisely allocated its recoveries. Because these factors
generally will result in a taxpayer claiming less than the proper
nonaccrual-experience amount the taxpayer would otherwise be entitled
to, the commentator requested that the IRS not change a taxpayer to the
specific charge-off method due to variances similar to those noted
above.
The IRS and Treasury Department do not intend that a taxpayer be
changed to the specific charge-off method due to unintentional and/or
immaterial variances, especially if a taxpayer is disadvantaged by such
variances. As a result, the temporary regulations require only that a
taxpayer maintain records that are sufficient to establish the amount
of any exclusion from gross income under section 448(d)(5) for the
taxable year. This rule is consistent and in accordance with Sec.
1.6001-1(a) (rules regarding records). However, the IRS maintains the
right to change a taxpayer to the specific charge-off method if such
taxpayer fails to maintain sufficient records to establish the amount
of any claimed exclusion from gross income under section 448(d)(5) for
the taxable year. The IRS and Treasury Department request comments on
this record keeping standard.
Periodic Systems
Notice 88-51, 1988-1 C.B. 535, provides guidance on the use of a
periodic system of applying the nonaccrual-experience method provided
in former Temp. Reg. Sec. 1.448-2T(e)(2). The periodic system entails
establishing an account based on the aggregate amount of accounts
receivable that: (1) Are eligible for the nonaccrual-experience method;
and (2) the taxpayer estimates will not be collected. The account is
adjusted each year to reflect the taxpayer's estimate (using its
nonaccrual-experience method) of the aggregate amount of the accounts
receivable outstanding at year-end that will not be collected. A
corresponding adjustment is then made to gross income.
The IRS and Treasury Department intend to update Notice 88-51 to
provide for the use of a periodic system by taxpayers using any
nonaccrual-experience method. Pending the issuance of this guidance, a
taxpayer may use the periodic system described in Notice 88-51 in
conjunction with any permissible nonaccrual-experience method used by
the taxpayer.
Accounting Method Change Procedures
A change from a nonaccrual-experience method by a taxpayer no
longer qualified to use such a method, a change to a nonaccrual-
experience method, a change from one nonaccrual-experience method to
another nonaccrual-experience method, or a change from using one safe
harbor method for self-testing to another safe harbor method, is a
change in method of accounting to which the provisions of sections 446
and 481, and the regulations thereunder, apply. The temporary
regulations provide, in most instances, automatic consent for these
changes. Taxpayers making these changes should follow the procedures of
Rev. Proc. 2002-9. Additionally, the temporary regulations provide
automatic consent procedures for taxpayers changing to a nonaccrual-
experience method to also request to change to a periodic system.
Additional Issues to be Addressed in Final Regulations
The IRS and Treasury Department intend to address additional issues
in future guidance that are not addressed in these temporary
regulations. Specifically, the IRS and Treasury Department request
comments on the effect on the computation of a taxpayer's nonaccrual-
experience as a result of a short taxable year, and an acquisition or
disposition of an entity during a taxable year, including the
acquisition or disposition of an entity disregarded for federal income
tax purposes. The IRS and Treasury Department also request comments on
whether the computation under the Actual Experience Method should be
based on the prior three taxable years or, as currently provided, the
current taxable year and the two immediately preceding taxable years.
Effect on Other Documents
The following publication is obsolete as of September 4, 2003:
Notice 2003-12 (2003-6 I.R.B. 422).
The following publication is modified to include in section 5.06 of
the Appendix as of September 4, 2003, only the changes in method of
accounting provided in Sec. 1.448-2T(g)(2)(ii), (g)(3)(i) and (h):
Rev. Proc. 2002-9 (2002-1 C.B. 327).
Special Analyses
It has been determined that these temporary regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. For application
of the Regulatory Flexibility Act, please refer to the cross-reference
notice of proposed rulemaking published elsewhere in this issue of the
Federal Register. Pursuant to section 7805(f) of the Internal Revenue
Code, these regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact.
Drafting Information
The principal author of these regulations is Terrance McWhorter of
the Office of Associate Chief Counsel (Income Tax and Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
[[Page 52500]]
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.448-2T is revised as follows:
Sec. 1.448-2T Nonaccrual of certain amounts by service providers
(temporary).
(a) In general. This section applies to taxpayers qualified to use
a nonaccrual-experience method of accounting provided for in section
448(d)(5) with respect to amounts to be received for the performance of
services. Except as otherwise provided in this section, a taxpayer is
qualified to use a nonaccrual-experience method of accounting if the
taxpayer uses an accrual method of accounting with respect to amounts
to be received for the performance of services by the taxpayer and
either--
(1) The services are in fields referred to in section 448(d)(2)(A)
and as described in Sec. 1.448-1T(e)(4) (i.e., health, law,
engineering, architecture, accounting, actuarial science, performing
arts, or consulting); or
(2) The taxpayer meets the $5 million annual gross receipts test of
section 448(c) and Sec. 1.448-1T(f)(2) for all prior taxable years.
(b) Nonaccrual-experience method; treatment as method of
accounting. Any taxpayer who satisfies the requirements of this section
is not required to accrue any portion of amounts to be received from
the performance of services that, on the basis of such person's
experience, and to the extent determined under the computation or
formula used by the taxpayer and allowed under this section, will not
be collected. This nonaccrual of amounts to be received for the
performance of services shall be treated as a method of accounting
under the Code (a nonaccrual-experience method).
(c) Method not available if interest charged on amounts due. A
nonaccrual-experience method of accounting may not be used with respect
to amounts due for which interest is required to be paid or for which
there is any penalty for failure to timely pay any amounts due. For
this purpose, the taxpayer will be treated as charging interest or
penalties for late payment if the contract or agreement expressly
provides for the charging of interest or penalties for late payment,
regardless of the practice of the parties. If the contract or agreement
does not expressly provide for the charging of interest or penalties
for late payment, the determination of whether the taxpayer charges
interest or penalties for late payment will be made based on all of the
facts and circumstances of the transaction, and not merely on the
characterization by the parties or the treatment of the transaction
under state or local law. However, the offering of a discount for early
payment of an amount due will not be regarded as the charging of
interest or penalties for late payment under this section, if--
(1) The full amount due is otherwise accrued as gross income by the
taxpayer at the time the services are provided; and
(2) The discount for early payment is treated as an adjustment to
gross income in the year of payment, if payment is received within the
time required for allowance of such discount. See paragraph (f) Example
1 of this section for an example of this rule.
(d) Method not available for certain receivables--(1) Amounts
earned and recognized through the performance of services. A
nonaccrual-experience method of accounting may be used only with
respect to amounts earned by the taxpayer and otherwise recognized in
income (an account receivable) through the performance of services by
such taxpayer. For example, a nonaccrual-experience method may not be
used with respect to amounts owed to the taxpayer by reason of the
taxpayer's activities with respect to lending money, selling goods, or
acquiring accounts receivable or other rights to receive payment from
other persons (including persons related to the taxpayer) regardless of
whether those persons earned such amounts through the provision of
services.
(2) Special rule. Except as otherwise provided, for purposes of
this section, accounts receivable do not include amounts that are not
billed (e.g., for charitable or pro bono services) or amounts
contractually not collectible (e.g., amounts in excess of a fee
schedule agreed to by contract). See paragraph (f) Examples 2 and 3 of
this section for examples of this rule.
(e) Use of experience to estimate uncollectible amounts--(1) In
general. In determining the portion of any amount due which, on the
basis of experience, will not be collected, the taxpayer may use one of
four safe harbor nonaccrual-experience methods of accounting provided
in paragraphs (e)(2) through (e)(5) of this section. Alternatively, the
taxpayer may use any other nonaccrual-experience method (``alternative
nonaccrual-experience method'') that clearly reflects the taxpayer's
nonaccrual-experience, subject to the requirements of paragraph (e)(6)
of this section. The safe harbor nonaccrual-experience methods provided
in paragraphs (e)(2) through (e)(5) of this section will be presumed to
clearly reflect a taxpayer's nonaccrual-experience. For purposes of
determining a taxpayer's nonaccrual-experience under any method
provided in this paragraph (e), accounts receivable described in
paragraphs (c) and (d) of this section are not taken into account. See
paragraph (g) of this section for procedures to obtain automatic
consent to change to one of the safe harbor nonaccrual experience
methods or to an alternative nonaccrual-experience method.
(2) Safe harbor 1: Six-year moving average method--(i) General
rule. A taxpayer may use a nonaccrual experience method under which the
taxpayer determines the uncollectible amount (six-year moving average
amount) by multiplying its accounts receivable balance at the end of
the current year by a percentage (six-year moving average percentage).
The six-year moving average percentage is computed by dividing--
(A) The total bad debts (with respect to accounts receivable)
sustained throughout the period consisting of the taxable year and the
five preceding taxable years (or, with the approval of the
Commissioner, a shorter period), adjusted for recoveries of bad debts
during such period; by
(B) The sum of the accounts receivable earned throughout the entire
six (or fewer) taxable year period (i.e., the total amount of sales
resulting in accounts receivable). See paragraph (f) Example 4 of this
section for an example of this method.
(ii) Period of less than six taxable years. A period shorter than
six taxable years generally will be appropriate only if the short
period consists of consecutive taxable years and there is a change in
the type of a substantial portion of the outstanding accounts
receivable such that the risk of loss is substantially increased. A
decline in the general economic conditions in the area, which
substantially increases the risk of loss, is a relevant factor in
determining whether a shorter period is appropriate. However, approval
to use a shorter period will not be granted unless the taxpayer
supplies specific evidence that the accounts receivable outstanding at
the close of the taxable years for the shorter period requested are not
comparable in nature and risk to accounts receivable outstanding at the
close of the six taxable years. A substantial increase in a taxpayer's
bad debt experience is not, by itself, sufficient to justify the use of
a shorter period. If approval is granted to use a
[[Page 52501]]
shorter period, the experience for the excluded taxable years shall not
be used for any subsequent year. A request for approval to exclude the
experience of a prior taxable year shall be made in accordance with the
applicable procedures for requesting a letter ruling and shall include
a statement of the reasons such experience should be excluded. A
request will not be considered unless it is sent to the Commissioner at
least 30 days before the close of the first taxable year for which such
approval is requested.
(iii) Special rule for new taxpayers. In the case of any current
taxable year that is preceded by less than 5 taxable years, paragraph
(e)(2)(i) of this section shall be applied by using the experience of
the current year and the actual number of preceding taxable years.
(3) Safe harbor 2: Actual experience method--(i) Option A: Three-
year moving average. A taxpayer may use a nonaccrual-experience method
under which the taxpayer determines the uncollectible amount (actual
nonaccrual-experience amount) by multiplying its year-end accounts
receivable balance by a percentage (three-year moving average
nonaccrual-experience percentage) reflecting its actual nonaccrual
experience with respect to its accounts receivable balance at the
beginning of the current taxable year and the two immediately preceding
taxable years. Under this safe harbor method, a taxpayer is allowed to
increase its actual nonaccrual-experience amount by 5 percent (adjusted
nonaccrual-experience amount). The taxpayer's three-year moving average
nonaccrual-experience percentage, actual nonaccrual-experience amount,
and adjusted nonaccrual-experience amount are determined according to
the following steps:
(A) STEP 1. Track the receivables in the taxpayer's accounts
receivable balance at the beginning of the current taxable year to
determine the dollar amount of the accounts receivable actually
determined to be uncollectible and charged off and not recovered or
determined to be collectible by the date selected by the taxpayer
(determination date) for the taxable year. The determination date may
not be later than the earlier of the due date, including extensions,
for filing the taxpayer's federal income tax return for that taxable
year or the date on which the taxpayer timely files such return for
that taxable year.
(B) STEP 2. Repeat STEP 1 for the taxpayer's accounts receivable
balance at the beginning of each of the two immediately preceding
taxable years.
(C) STEP 3. To determine the taxpayer's three-year moving average
nonaccrual-experience percentage, divide the sum of the net
uncollectible amounts from STEP 1 and STEP 2 by the sum of the accounts
receivable balance at the beginning of the current taxable year and the
accounts receivable balance at the beginning of each of the two
preceding taxable years.
(D) STEP 4. Multiply the percentage computed in STEP 3 by the
taxpayer's accounts receivable balance at the end of the current
taxable year. The product is the taxpayer's actual nonaccrual-
experience amount for the current taxable year.
(E) STEP 5. To determine the taxpayer's adjusted nonaccrual-
experience amount, multiply the actual nonaccrual-experience amount
from STEP 4 by 1.05. See paragraph (f) Example 5 of this section for an
example of this method.
(ii) Option B: Up to three-year moving average. Alternatively,
except as provided in paragraph (e)(3)(iii) of this section, in
computing its adjusted nonaccrual-experience amount described in
paragraph (e)(3)(i) of this section, a taxpayer may use: its current
year nonaccrual-experience percentage for the first taxable year this
method is used; a two-year moving average nonaccrual-experience
percentage for the second taxable year this method is used; and a
three-year moving average nonaccrual-experience percentage for the
third, and each succeeding, taxable year this method is used. See
paragraph (f) Examples 6, 7, and 8 of this section for examples of this
method.
(iii) Special rule for new taxpayers. Any newly formed taxpayer
that wants to use the safe harbor nonaccrual-experience method of
accounting described in paragraph (e)(3)(ii) of this section in its
first taxable year and does not have any accounts receivable upon
formation will not be able to exclude any portion of its year-end
accounts receivable from income for its first taxable year because the
taxpayer does not have any accounts receivable on the first day of the
taxable year to track. Therefore, the taxpayer must begin creating its
three-year moving average in its second taxable year by tracking the
accounts receivables as of the first day of its second taxable year.
(4) Safe harbor 3: Modified Black Motor method--(i) In general. A
taxpayer may use a nonaccrual-experience method under which the
taxpayer determines the uncollectible amount (modified Black Motor
amount) by multiplying its accounts receivable balance at the end of
the current taxable year by a percentage (Black Motor moving average
percentage), and then reducing the resulting amount by the credit
charges (accounts receivable) generated and written off during the
current taxable year. The Black Motor moving average percentage is
computed by dividing--
(A) The total bad debts sustained in the current taxable year and
the five preceding taxable years (or, with the approval of the
Commissioner, a shorter period), adjusted for recoveries of bad debts
during such period; by
(B) The sum of accounts receivable at the end of the current
taxable year and the five preceding (or fewer) taxable years. See
paragraph (f) Example 10 of this section for an example of this method.
(ii) Period of less than six taxable years. The rules of paragraph
(e)(2)(ii) of this section (regarding periods of less than six taxable
years) shall apply to taxpayers using the Modified Black Motor method.
(iii) Special rules for new taxpayers. In the case of any current
taxable year that is preceded by less than 5 taxable years, paragraph
(e)(4)(i) of this section shall be applied by using the experience of
the current taxable year and the actual number of preceding taxable
years.
(5) Safe harbor 4: Modified six-year moving average method--(i) In
general. A taxpayer may use a nonaccrual-experience method under which
the taxpayer determines the uncollectible amount (modified six-year
moving average amount) by multiplying its accounts receivable balance
at the end of the current year by a percentage (modified six-year
moving average percentage). The modified six-year moving average
percentage is computed by dividing--
(A) The total bad debts sustained in the current taxable year and
the five preceding taxable years (or, with the approval of the
Commissioner, a shorter period) other than the credit charges (accounts
receivable) that were written off in the same taxable year they were
generated, adjusted for recoveries of bad debts during such period; by
(B) The sum of accounts receivable at the end of the current
taxable year and the five preceding (or fewer) taxable years. See
paragraph (f) Example 11 of this section for an example of this method.
(ii) Period of less than six taxable years. The rules of paragraph
(e)(2)(ii) of this section (regarding periods of less than six taxable
years) shall apply to taxpayers using the Modified six-year moving
average method.
(iii) Special rules for new taxpayers. In the case of any current
taxable year
[[Page 52502]]
that is preceded by less than 5 taxable years, paragraph (e)(5)(i) of
this section shall be applied by using the experience of the current
taxable year and the actual number of preceding taxable years.
(6) Alternative nonaccrual-experience method--(i) In general. A
taxpayer may use any alternative nonaccrual-experience method that
clearly reflects the taxpayer's actual nonaccrual-experience, provided
the taxpayer's alternative nonaccrual-experience method meets the self-
test requirements described in this paragraph (e)(6).
(ii) Self-testing. A taxpayer using, or desiring to use, an
alternative nonaccrual-experience method must ``self-test'' its
alternative nonaccrual-experience method for its first taxable year
ending after March 9, 2002, for which the taxpayer uses, or desires to
use, that alternative nonaccrual-experience method (first-year self-
test), and every three taxable years thereafter (three-year self-test).
Each self-test shall be performed by comparing the nonaccrual-
experience amount under the taxpayer's alternative nonaccrual-
experience method (alternative nonaccrual-experience amount) with the
nonaccrual-experience amount that would have resulted from use of one
safe harbor method described in paragraph (e)(2), (e)(3), (e)(4), or
(e)(5) of this section selected by the taxpayer for use in conducting
the self test (safe harbor comparison method), for the test period.
(iii) Selection of safe harbor comparison method--(A) First-year
self-test. For purposes of conducting the first-year self-test required
under paragraph (e)(6)(ii) of this section, a taxpayer may self-test
its alternative nonaccrual-experience method against any safe harbor
method provided in paragraphs (e)(2) through (e)(5) of this section.
See paragraph (f) Example 12 of this section for an example of this
rule.
(B) Three-year self-test. For purposes of conducting any three-year
self-test required under paragraph (e)(6)(ii) of this section, the
taxpayer must self-test its alternative nonaccrual-experience method
against the same safe harbor comparison method used for the immediately
preceding self-test. For purposes of the three-year self-test, the
cumulative nonaccrual-experience amount for the safe harbor comparison
method is computed by using, for each taxable year of the test period,
the same safe harbor comparison method used during the immediately
preceding self test (cumulative safe harbor nonaccrual-experience
amount). See paragraph (f) Example 13 of this section for an example of
this rule.
(C) Change of safe harbor comparison method. (1) A taxpayer that
wants to change the safe harbor comparison method it uses for purposes
of the self-testing requirement of paragraph (e)(6)(ii) of this section
may do so only for the first taxable year following any three-year
self-test period and in accordance with this paragraph (e)(6)(iii)(C).
A change in the taxpayer's safe harbor comparison method is a change in
method of accounting to which the procedures of sections 446 and 481,
and the regulations thereunder, apply.
(2) For the taxable year a taxpayer wishes to change its safe
harbor comparison method, the taxpayer must self-test its alternative
nonaccrual-experience method against any safe harbor method provided in
paragraphs (e)(2) through (e)(5) of this section other than the safe
harbor comparison method currently used by the taxpayer and such self-
test shall be conducted as if such self-test was a first-year self-
test.
(3) If the self-test described in paragraph (e)(6)(iii)(C)(2) of
this section results in the taxpayer's alternative nonaccrual-
experience method clearly reflecting the taxpayer's nonaccrual-
experience as determined under paragraph (e)(6)(iv) of this section,
then the taxpayer may change its safe harbor comparison method in
accordance with the procedures under paragraph (g)(3) of this section.
Such change shall be made on a cut-off basis and without audit
protection.
(4) If the self-test described in paragraph (e)(6)(iii)(C)(2) of
this section results in the taxpayer's alternative nonaccrual-
experience method not clearly reflecting the taxpayer's nonaccrual-
experience as determined under paragraph (e)(6)(vi)(A) of this section,
then the taxpayer cannot use the safe harbor comparison method selected
and must either--
(i) Continue using its current safe harbor comparison method; or
(ii) Select another safe harbor comparison method, subject to the
requirements of paragraphs (e)(6)(iii)(C)(2) and (3) of this section.
(5) If a taxpayer meets the requirements of this paragraph
(e)(6)(iii)(C) to change its safe harbor comparison method, the new
safe harbor comparison method is not used for purposes of conducting
the three-year self-test required by paragraph (e)(6)(ii) of this
section for the taxable year immediately preceding the taxable year the
taxpayer is permitted to change its safe harbor comparison method. The
taxpayer's former safe harbor comparison method is used for purposes of
conducting such three-year self-test and for purposes of determining
any recapture amount under paragraph (e)(6)(vi)(B) of this section.
(iv) Treated as clearly reflecting nonaccrual-experience. If the
alternative nonaccrual-experience amount for the first-year self-test
(or the cumulative nonaccrual-experience amount for the three-year
self-test, as applicable) is less than or equal to the nonaccrual-
experience amount determined under paragraph (e)(6)(iii)(A) of this
section (first-year self-test) or the cumulative safe harbor
nonaccrual-experience amount determined under paragraph (e)(6)(iii)(B)
of this section (three-year self-test), as applicable, of this section
for the test period, then--
(A) The taxpayer's alternative nonaccrual-experience method will be
treated as clearly reflecting its nonaccrual-experience for the test
period; and
(B) The taxpayer may continue to use that alternative nonaccrual-
experience method, subject to a requirement to self-test again after
three taxable years.
(v) Contemporaneous documentation. For purposes of paragraph (e)(6)
of this section, a taxpayer must document in its books and records, in
the taxable year any first-year or three-year self-test is performed,
the safe harbor comparison method used to conduct the self-test,
including appropriate documentation and computations that resulted in
the determination that the taxpayer's alternative nonaccrual-experience
method clearly reflected the taxpayer's nonaccrual-experience for the
applicable test period.
(vi) Special rules for alternative nonaccrual-experience method.
(A) First-year self-test. If, as a result of the first-year self-test
requirement of paragraph (e)(6)(ii) of this section, the alternative
nonaccrual-experience amount for the test period is greater than the
safe harbor nonaccrual-experience amount for the test period, then--
(1) The taxpayer's alternative nonaccrual-experience method will be
treated as not clearly reflecting its nonaccrual-experience;
(2) The taxpayer will not be permitted to use that alternative
nonaccrual-experience method in such taxable year; and
(3) The taxpayer must change to (or adopt) for such taxable year
either--
(i) A safe harbor nonaccrual-experience method described in
paragraphs (e)(2) through (e)(5) of this section; or
(ii) Another alternative nonaccrual-experience method, subject to
the first-year self-test requirement of paragraph (e)(6)(ii) of this
section. See paragraph
[[Page 52503]]
(f) Example 14 of this section for an example of this rule.
(B) Three-year self-test. If, as a result of the three-year self-
test requirement of paragraph (e)(6)(ii) of this section, the
cumulative alternative nonaccrual-experience amount for the test period
is greater than the cumulative safe harbor nonaccrual-experience amount
for the test period, the taxpayer's alternative nonaccrual-experience
amount will be limited to the cumulative safe harbor nonaccrual-
experience amount for the test period. Any excess of the taxpayer's
cumulative alternative nonaccrual-experience amount over the taxpayer's
cumulative safe harbor nonaccrual-experience amount excluded from
income during the test period must be recaptured into income in
accordance with paragraph (e)(6)(vii) of this section. The taxpayer may
continue to use its alternative nonaccrual-experience method, subject
to the three-year self-test requirement in paragraph (e)(6)(ii) of this
section. See paragraph (f) Example 15 of this section for an example of
this rule.
(vii) Recapture--(1) In general. Any amount required to be
recaptured pursuant to paragraph (e)(6)(vi)(B) of this section must be
included in income in the third taxable year of the three-year self-
test period. See paragraph (f) Example 15 of this section for an
example of this rule.
(7) Special rules--(i) Application to specific accounts receivable.
The nonaccrual-experience method shall be applied with respect to each
account receivable of the taxpayer that is eligible for such method.
With respect to a particular account receivable, the taxpayer will
determine, in the manner prescribed in paragraphs (e)(2) through (e)(6)
of this section (whichever applies), the amount of such account
receivable that is not expected to be collected. Such determination
shall be made only once with respect to each account receivable,
regardless of the term of such receivable. The estimated uncollectible
amount shall not be recognized as gross income. Thus, the amount
recognized as gross income shall be the amount that would otherwise be
recognized as gross income with respect to the account receivable, less
the amount which is not expected to be collected. A taxpayer that
excludes an amount from income during a taxable year as a result of the
taxpayer's use of a nonaccrual-experience method cannot deduct in any
subsequent taxable year the amount excluded from income. Thus, the
taxpayer cannot deduct the excluded amount in a subsequent taxable year
in which the taxpayer actually determines that the amount is
uncollectible and charges it off. If a taxpayer using a nonaccrual-
experience method determines that an amount that was not excluded from
income is uncollectible and should be charged off (e.g., a calendar-
year taxpayer determines on November 1st that an account receivable
that was originated on May 1st of the same year is uncollectible and
should be charged off) the taxpayer may deduct the amount charged off
when it is charged off, but must include any subsequent recoveries in
income. The reasonableness of a taxpayer's determinations that amounts
are uncollectible and should be charged off may be considered on
examination. See paragraph (f) Example 16 of this section for an
example of this rule.
(ii) Charge-off. For purposes of this section, amounts charged-off
shall include only those amounts that would otherwise be allowable
under section 166(a).
(iii) Recoveries. Regardless of the nonaccrual-experience method of
accounting used by a taxpayer under this section, the taxpayer must
take into account recoveries of amounts previously charged off. If, in
a subsequent taxable year, a taxpayer recovers an amount previously
excluded from income under a nonaccrual-experience method or charged
off, the taxpayer must include the recovered amount in income in that
subsequent taxable year. See paragraph (f) Example 17 of this section
for an example of this rule.
(iv) Application of nonaccrual-experience method. The rules of
section 448(d)(5) and the regulations thereunder shall be applied
separately to each taxpayer. For purposes of section 448(d)(5), the
term ``taxpayer'' has the same meaning as the term ``person'' defined
in section 7701(a)(1) (rather than the meaning of the term ``taxpayer''
defined in section 7701(a)(14)).
(v) Record keeping requirements. (A) A taxpayer using a nonaccrual-
experience method shall keep such books and records as are sufficient
to establish the amount of any exclusion from gross income under
section 448(d)(5) for the taxable year, including books and records
demonstrating--
(1) The nature of the taxpayer's nonaccrual-experience method;
(2) Whether, for any particular taxable year, the taxpayer
qualifies to use its nonaccrual-experience method (including the self-
testing requirements of paragraph (e)(6)(ii) of this section (if
applicable));
(3) The taxpayer's determination that amounts are uncollectible;
and
(4) The proper amount that is excludable under the taxpayer's
nonaccrual-experience method.
(B) A taxpayer that does not maintain records of the data that are
sufficient to establish the amount of any exclusion from gross income
under section 448(d)(5) for the taxable year may be subject to being
changed by the IRS on examination to the specific charge-off method.
See Sec. 1.6001-1 for rules regarding records.
(f) Examples. The following examples illustrate the provisions of
this section. In each example, the taxpayer uses a calendar year for
federal income tax purposes and an accrual method of accounting, does
not require the payment of interest or penalties with respect to past
due accounts receivable and, in the case of Examples 5 through 8 and 12
through 15, selects an appropriate determination date for each taxable
year.
Example 1. Charging interest and/or penalties. A has two billing
methods for the amounts to be received from A's provision of
services described in paragraph (a)(1) of this section. Under one
method, for amounts that are more than 90 days past due, A charges
interest at a market rate until such amounts (together with
interest) are paid. Under the other billing method, A charges no
interest for amounts past due. Pursuant to paragraph (c) of this
section, A may not use a nonaccrual-experience method of accounting
with respect to any of the amounts billed under the method that
charges interest on amounts that are more than 90 days past due. A
may, however, use the nonaccrual-experience method with respect to
the amounts billed under the method that does not charge interest
for amounts past due.
Example 2. Contractual allowance or adjustment. B, a healthcare
provider, performs a medical procedure on individual C, who has
health insurance coverage with IC, an insurance company. B bills IC
and C for $5,000, B's standard charge for this medical procedure.
However, B has a contract with IC that obligates B to accept $3,500
as full payment for the medical procedure if the procedure is
provided to a patient insured by IC. Under the contract, only $3,500
of the $5,000 billed by B is legally collectible from IC and C. The
remaining $1,500 represents a contractual allowance or contractual
adjustment. Thus, pursuant to paragraph (d)(2) of this section, the
remaining $1,500 is not a contractually collectible amount for
purposes of this section and B may not use a nonaccrual-experience
method with respect to this portion of the accounts receivable.
Example 3. Charitable or pro bono services. D, a law firm,
agrees to represent individual E in a legal matter and to provide
services to E on a pro bono basis. D normally charges $500 for these
services. Because D performed its services to E pro bono, D's
services were never billed or intended to result in revenue. Thus,
pursuant to paragraph (d)(2) of this section, the $500 forgone legal
fee is not a
[[Page 52504]]
collectible amount for purposes of this section and D may not use a
nonaccrual-experience method with respect to this portion of the
accounts receivable.
Example 4. Safe harbor 1: Six-year moving average method. (i) F
uses the six-year moving average method described in paragraph
(e)(2) of this section. F's total accounts receivable and bad debt
experience for the current taxable year (2002) and the five
preceding taxable years are as follows:
------------------------------------------------------------------------
Bad debts
Total adjusted
Taxable year accounts for
receivable recoveries
------------------------------------------------------------------------
1997.......................................... $30,000 $5,700
1998.......................................... 40,000 7,200
1999.......................................... 40,000 11,000
2000.......................................... 60,000 10,200
2001.......................................... 70,000 14,000
2002.......................................... 80,000 16,800
--------------
Total..................................... $330,000 $64,900
------------------------------------------------------------------------
(ii) Thus, F's six-year moving average percentage is 19.67%
($64,900/$330,000). Assume that $49,300 of the total $80,000 of
accounts receivable earned throughout the taxable year 2002 is
outstanding as of the close of that taxable year. F's nonaccrual-
experience amount using the six-year moving average safe harbor
method is computed by multiplying $49,300 by the six-year moving
average percentage of .1967, or $9,697. Thus, F may exclude $9,697
from gross income for 2002.
Example 5. Safe harbor 2: Actual experience method (Option A).
(i) G is eligible to use a nonaccrual-experience method and wishes
to adopt the actual experience method of paragraph (e)(3)(i) of this
section. G has the data necessary to track the uncollectible amounts
in its beginning-of-year accounts receivable for the current taxable
year and the two immediately preceding taxable years. G determines
that its actual accounts receivable collection experience is as
follows:
------------------------------------------------------------------------
Beginning A/R
amount
Total A/R charged off
balance at by
Taxable year beginning determination
of year date
(adjusted for
recoveries)
------------------------------------------------------------------------
2000........................................ $1,000,000 $35,000
2001........................................ 760,000 75,000
2002........................................ 1,975,000 65,000
--------------
Total................................... $3,735,000 $175,000
------------------------------------------------------------------------
(ii) G's ending A/R Balance on 12/31/2002 is $880,000. In 2002,
G chooses to compute its nonaccrual-experience amount by using the
three-year moving average under Option A of paragraph (e)(3)(i) of
this section. Thus, G's three-year moving average nonaccrual-
experience percentage is 4.7%, determined by dividing the sum of the
amount of G's receivables in its account on January 1st of 2000,
2001, and 2002, that were determined to be uncollectible and charged
off (adjusted for recoveries) on or before the corresponding
determination dates, by the sum of the balances of G's accounts
receivable account on January 1st of 2000, 2001, and 2002 (i.e.,
$175,000/$3,735,000 or 4.7%). Thus, G's actual nonaccrual-experience
amount for 2002 is determined by multiplying this percentage by the
balance of G's accounts receivable account on December 31, 2002
(i.e., $880,000 x 4.7% = $41,360). G is permitted to exclude from
gross income in 2002 an amount equal to 105% of G's actual
nonaccrual-experience amount, or $43,428 ($41,360 x 105%). This is
G's adjusted nonaccrual-experience amount for 2002.
Example 6. Safe harbor 2: Actual experience method (Option B).
The facts are the same as Example 5, except that G has not
maintained the data necessary to use Option A of paragraph (e)(3)(i)
of this section. G determines that, of its 2002 beginning-of-year
receivables of $1,975,000, $65,000 were determined to be
uncollectible and charged off (adjusted for recoveries) on or before
September 15, 2003, the date G timely files its federal income tax
return for 2002 (the determination date). G chooses to use Option B
of paragraph (e)(3)(ii) of this section to compute its adjusted
nonaccrual-experience amount for 2002. G's current year nonaccrual-
experience percentage is 3.3%, determined by dividing the amount of
G's receivables in its account on January 1, 2002, that were charged
off as uncollectible (adjusted for recoveries) on or before the
determination date, by the balance of G's accounts receivable
account on January 1, 2002 (i.e., $65,000/$1,975,000 or 3.3%). Thus,
G's actual nonaccrual-experience amount for 2002 is determined by
multiplying this percentage by the balance of G's accounts
receivable account on December 31, 2002 (i.e., $880,000 x 3.3% =
$29,040). G is permitted to exclude from gross income in 2002 an
amount equal to 105% of G's actual nonaccrual-experience amount, or
$30,492 ($29,040 x 105%). This is G's adjusted nonaccrual-experience
amount for 2002.
Example 7. (i) The facts are the same as Example 6. G
determines that its accounts receivable collection experience for
2003 is as follows:
------------------------------------------------------------------------
Beginning A/R
amount
Total A/R charged off
balance at by
Taxable year beginning determination
of year date
(adjusted for
recoveries)
------------------------------------------------------------------------
2002........................................ $1,975,000 $65,000
2003........................................ 880,000 95,000
--------------
Total................................... $2,855,000 $160,000
------------------------------------------------------------------------
(ii) G's ending A/R Balance on 12/31/2003 is $2,115,000. In
2003, G must compute its nonaccrual-experience amount using an
average of its actual nonaccrual-experience for 2002 and 2003 (in
accordance with Option B of paragraph (e)(3)(ii) of this section).
Thus, G's two-year moving average nonaccrual-experience percentage
is 5.6%, determined by dividing the sum of the amount of G's
receivables in its accounts on January 1st of 2002 and 2003, that
were determined to be uncollectible and charged off (adjusted for
recoveries) on or before the corresponding determination dates, by
the sum of the balances of G's accounts receivable account on
January 1st of 2002 and 2003 (i.e., $160,000/$2,855,000 or 5.6%).
Thus, G's actual nonaccrual-experience amount for 2003 is determined
by multiplying this percentage by the balance of G's accounts
receivable account on December 31, 2003 (i.e., $2,115,000 x 5.6% =
$118,440). G is permitted to exclude from gross income in 2003 an
amount equal to 105% of G's actual nonaccrual-experience amount, or
$124,362 ($118,440 x 105%). This is G's adjusted nonaccrual-
experience amount for 2003.
Example 8. (i) The facts are the same as Example 7. G determines
that its accounts receivable collection experience for 2004 is as
follows:
------------------------------------------------------------------------
Beginning A/R
amount
Total A/R charged off
balance at by
Taxable year beginning determination
of year date
(adjusted for
recoveries)
------------------------------------------------------------------------
2002........................................ $1,975,000 $65,000
2003........................................ 880,000 95,000
2004........................................ 2,115,000 105,000
--------------
Total................................... $4,970,000 $265,000
------------------------------------------------------------------------
(ii) G's ending A/R Balance on 12/31/2004 is $1,600,000. In
2004, G must compute its nonaccrual-experience amount using an
average of its actual nonaccrual-experience for 2002, 2003, and 2004
(in accordance with Option B of paragraph (e)(3)(ii) of this
section). Thus, G's actual three-year moving average nonaccrual-
experience percentage is 5.3%, determined by dividing the sum of the
amount of G's receivables in its account on January 1st of 2002,
2003, and 2004, that were determined to be uncollectible and charged
off (adjusted for recoveries) on or before the corresponding
determination dates, by the sum of the balances of G's accounts
receivable account on January 1st of 2002, 2003, and 2004 (i.e.,
$265,000/$4,970,000 or 5.3%). Thus, G's actual nonaccrual-experience
amount for 2004 is determined by multiplying this percentage by the
balance of G's accounts receivable account on December 31, 2004
(i.e., $1,600,000 x 5.3% = $84,800). G is permitted to exclude from
gross income in 2004 an amount equal to 105% of G's actual
nonaccrual-experience amount, or $89,040 ($84,800 x 105%). This is
G's adjusted nonaccrual-experience amount for 2004. Thereafter, G
must continue to use a three-year moving average to compute its
actual nonaccrual-experience, or obtain approval of the Commissioner
to change its nonaccrual-experience method of accounting.
Example 9. H has not tracked its 2002 beginning-of-year
accounts receivable. Therefore, H may not use the actual experience
method described in paragraph (e)(3) of this section for 2002. H may
use this method for 2003 if H tracks its 2003 beginning-of-year
receivables, and
[[Page 52505]]
otherwisecomplies with the requirements of this section.
Example 10. Safe harbor 3: Modified Black Motor method. (i) J
uses the modified Black Motor method described in paragraph (e)(4)
of this section. J's total accounts receivable and bad debt
experience for the current taxable year (2002) and the five
preceding taxable years are as follows:
------------------------------------------------------------------------
Accounts
receivable Bad debts
Taxable year at end of (adjusted
taxable for
year recoveries)
------------------------------------------------------------------------
1997.......................................... $130,000 $9,100
1998.......................................... 140,000 7,000
1999.......................................... 140,000 14,000
2000.......................................... 160,000 14,400
2001.......................................... 170,000 20,400
2002.......................................... 180,000 10,800
--------------
Total..................................... $920,000 $75,700
------------------------------------------------------------------------
(ii) Thus, J's Black Motor moving average percentage is 8.228%
($75,700/$920,000). Assume that the credit charges (accounts
receivable) generated and written off during the current taxable
year were $3,600. J's modified Black Motor amount is $11,210,
computed by multiplying J's accounts receivable at December 31, 2002
($180,000) by the Black Motor moving average percentage of .08228
and reducing the resulting amount by $3,600 (J's credit charges
(accounts receivable) generated and written off during the 2002
taxable year). Thus, J may exclude $11,210 from gross income for
2002.
Example 11. Safe harbor 4: Modified six-year moving average
method. (i) The facts are the same as Example 10, except that J uses
the modified six-year moving average method described in paragraph
(e)(5) of this section. Assume further that the credit charges
(accounts receivable) that were written off in the same taxable year
they were generated, adjusted for recoveries of bad debts during
such period are as follows:
------------------------------------------------------------------------
Credit
charges
written off
in same
taxable
Taxable Year year as
generated
(adjusted
for
recoveries)
------------------------------------------------------------------------
1997....................................................... $3,033
1998....................................................... 2,333
1999....................................................... 4,667
2000....................................................... 4,800
2001....................................................... 6,800
2002....................................................... 3,600
------------
Total.................................................. $25,233
------------------------------------------------------------------------
(ii) Thus, J's modified six-year moving average percentage is
5.486% (($75,700--$25,233)/$920,000). J's modified six-year moving
average amount is $9,875, computed by multiplying J's accounts
receivable at December 31, 2002 ($180,000) by the modified six-year
moving average percentage of .05486. Thus, J may exclude $9,875 from
gross income for 2002.
Example 12. Selection of a safe harbor method. (i) Beginning in
2002, K is eligible to use a nonaccrual-experience method and wishes
to adopt an alternative nonaccrual-experience method similar to the
method described in Black Motor Co. v. Comm'r, 41 B.T.A. 300 (1940),
aff'd, 125 F.2d 977 (6th Cir. 1942). Pursuant to paragraph
(e)(6)(ii) of this section, K must self-test its alternative
nonaccrual-experience method for the first taxable year it is used
(2002), and every three taxable years thereafter for which K uses
its alternative nonaccrual-experience method. Pursuant to paragraph
(e)(6)(iii) of this section, K selects safe harbor 2 (actual
experience method) for purposes of conducting its first year self-
test. Thus, beginning in 2002, K must begin tracking its beginning-
of-year accounts receivable and computing its actual nonaccrual-
experience as provided in paragraph (e)(3) of this section. However,
because K lacks the data to use Option A (three-year moving average)
under paragraph (e)(3)(i) of this section, K selects Option B (up to
three-year moving average) under paragraph (e)(3)(ii) of this
section. K's actual nonaccrual-experience amount and alternative
nonaccrual-experience amount for 2002 are set forth below:
----------------------------------------------------------------------------------------------------------------
Beginning A/R
amount
Total A/R charged off Alternative
balance at by nonaccrual-
Taxable year beginning determination experience
of year date amount
(adjusted for
recoveries)
----------------------------------------------------------------------------------------------------------------
2002................................................................... $350,000 $14,000 $20,700
----------------------------------------------------------------------------------------------------------------
(ii) K's ending A/R Balance on 12/31/2002 is $500,000. K's
actual nonaccrual-experience percentage is 4%, determined by
dividing the amount of K's receivables in its account on January 1,
2002, that were charged off as uncollectible (adjusted for
recoveries) on or before the determination date, by the balance of
K's accounts receivable account on January 1, 2002 (i.e., $14,000/
$350,000 or 4%). Thus, K's actual nonaccrual-experience amount for
2002 is determined by multiplying this percentage by the balance of
K's accounts receivable account on December 31, 2002 (i.e., $500,000
x 4% = $20,000). Because K's alternative nonaccrual-experience
amount for 2002 ($20,700) is not greater than 105% of its actual
nonaccrual-experience amount for 2002 (i.e., $20,000 x 1.05 =
$21,000), pursuant to paragraph (e)(6)(iv) of this section, K's
alternative nonaccrual-experience method will be treated as clearly
reflecting its nonaccrual-experience for the test period 2002.
Pursuant to paragraph (e)(6)(iv)(B) of this section, K may continue
to use its alternative nonaccrual-experience method. Additionally,
pursuant to paragraph (e)(6)(iv)(B) of this section, K is required
to self-test its alternative nonaccrual-experience method again in
2006, for taxable years 2003 through 2005 and, pursuant to paragraph
(e)(6)(iii)(B) of this section, K must self-test its alternative
nonaccrual-experience method against the actual experience method
when conducting its three year self-test in 2006.
Example 13. (i) The facts are the same as Example 12. K's
alternative nonaccrual-experience amounts for taxable years 2003-
2005 are as follows:
----------------------------------------------------------------------------------------------------------------
Beginning A/R
amount
Total A/R charged off Actual Alternative
balance at by nonaccrual- nonaccrual-
Taxable Year beginning determination experience experience
of year date amount amount
(adjusted for
recoveries)
----------------------------------------------------------------------------------------------------------------
2003...................................................... $440,000 $30,000 $42,329 $43,050
2004...................................................... 760,000 65,000 138,183 140,200
2005...................................................... 1,965,000 65,000 101,106 110,550
--------------
Total................................................. $3,165,000 $160,000 $281,618 $293,800
----------------------------------------------------------------------------------------------------------------
[[Page 52506]]
(ii) Assume that K's ending A/R balance on 12/31/05 is $2,000,000.
Because K's cumulative alternative nonaccrual-experience amount for the
test period ($293,800) is not greater than K's cumulative adjusted
nonaccrual-experience amount (cumulative actual nonaccrual-experience
amount x 105%) for the same period ($281,618 x 1.05 = $295,699),
pursuant to paragraph (e)(6)(iv) of this section K's alternative
nonaccrual-experience method will be treated as clearly reflecting its
nonaccrual-experience for the test period. Pursuant to paragraph
(e)(6)(iv)(B) of this section, K may continue to use its alternative
nonaccrual-experience method. Additionally, pursuant to paragraph
(e)(6)(iv)(B) of this section, K is required to self-test its
alternative nonaccrual-experience method again in 2009, for taxable
years 2006 through 2008 and, pursuant to paragraph (e)(6)(iii)(B) of
this section, K must self-test its alternative nonaccrual-experience
method against the actual experience method when conducting its three
year self-test in 2009.
Example 14. The facts are the same as Example 12, except that
K's alternative nonaccrual-experience amount for 2002 is $22,000.
Because K's alternative nonaccrual-experience amount for 2002
($22,000) is greater than 105% of its actual nonaccrual-experience
amount for 2002 (i.e., $20,000 x 1.05 = $21,000), pursuant to
paragraph (e)(6)(vi)(A) of this section, K's alternative nonaccrual-
experience method will be treated as not clearly reflecting its
nonaccrual experience for 2002. Accordingly, K must either adopt a
safe harbor nonaccrual-experience method described in paragraphs
(e)(2) (six-year moving average method), (e)(3) (actual experience
method), (e)(4) (modified Black Motor method), or (e)(5) (modified
six-year moving average method) of this section, or an alternative
nonaccrual-experience method under paragraph (e)(6) of this section
(subject to the self-testing requirements of paragraph (e)(6)(ii) of
this section).
Example 15. The facts are the same as Example 13, except that
K's cumulative alternative nonaccrual-experience amount for 2003-
2005 is $300,000. Because K's cumulative alternative nonaccrual-
experience amount for the three year test period (taxable years
2003-2005) is greater than its cumulative adjusted nonaccrual-
experience amount for the three year test period ($295,699),
pursuant to paragraph (e)(6)(vi)(B) of this section the $4,301
excess of K's cumulative alternative nonaccrual-experience amount
over K's cumulative adjusted nonaccrual-experience amount for the
three year test period must be recaptured into income in 2005 in
accordance with paragraph (e)(6)(vii) of this section. K may
continue to use its alternative nonaccrual-experience method,
subject to the three-year self-test requirement in paragraph
(e)(6)(ii) of this section.
Example 16. Subsequent worthlessness of year-end receivable. The
facts are the same as Example 4. Assume that one of the accounts
receivable outstanding at the end of 2002 was for $8,000, and that
in 2003, under section 166, the entire amount of this receivable
becomes wholly worthless. Because F did not accrue as income $1,573
of this account receivable ($8,000 x .1967) under the nonaccrual-
experience method in 2002, pursuant to paragraph (e)(7)(i) of this
section F may not deduct this portion of the account receivable as a
bad debt deduction under section 166 in 2003. F may deduct the
remaining balance of the receivable in 2003 as a bad debt deduction
under section 166 ($8,000 - $1,574 = $6,426).
Example 17. Subsequent collection of year-end receivable. The
facts are the same as in Example 4. Assume that an account
receivable of $1,700 outstanding at the end of 2002 was collected in
full by F in 2003. Pursuant to paragraph (e)(7)(iii) of this
section, F must recognize additional gross income in 2003 equal to
the portion of this receivable that F excluded from gross income in
the prior year ($1,700 x .1967 = $334).
(g) Changes to a nonaccrual-experience method of accounting--(1) In
general. A change to a nonaccrual-experience method is a change in
method of accounting to which the provisions of sections 446 and 481,
and the regulations thereunder, apply.
(2) Taxpayers no longer qualified under section 448 to use a
nonaccrual-experience method--(i) First taxable year ending after March
9, 2002. For a taxpayer who no longer qualifies under section
448(d)(5), as amended, to use a nonaccrual-experience method, consent
is hereby granted to change from the nonaccrual-experience method to
the specific charge-off method for its first taxable year ending after
March 9, 2002. Such change shall be made in accordance with the
provisions of this paragraph (g)(2). Pursuant to the consent granted by
this paragraph (g)(2), a taxpayer described in this paragraph (g)(2)
that is using a nonaccrual experience method must change such method of
accounting to the specific charge-off method for its first taxable year
ending after March 9, 2002. The net amount of the required section
481(a) adjustment is to be taken into account over a period of 4
taxable years (or, if less, the number of taxable years that the
taxpayer has used the nonaccrual-experience method). The taxpayer
should attach Form 3115 to its income tax return for the year of
change, and write ``Change from the Nonaccrual-Experience Method under
Sec. 1.448-2T(g)'' at the top of the form. However, such a taxpayer is
not required to file a Form 3115 with the national office, or pay any
associated user fee.
(ii) For taxable years subsequent to first taxable year ending
after March 9, 2002. Taxpayers who no longer qualify under section
448(d)(5), as amended, to use a nonaccrual-experience method in a
taxable year subsequent to the first taxable year ending after March 9,
2002, must follow the administrative procedures issued under Sec.
1.446-1(e)(3)(ii) for obtaining the Commissioner's automatic consent to
a change in accounting method. (For further guidance, for example, see
Rev. Proc. 2002-9, 2002-1 C.B. 327, and Sec. 601.601(d)(2)(ii)(b) of
this chapter.)
(3) Taxpayers permitted to use a nonaccrual-experience method--(i)
In general. Except as provided in paragraphs (g)(3)(ii) (regarding
scope limitations) and (g)(4) (regarding certain concurrent changes) of
this section, a taxpayer that wants to change to a nonaccrual-
experience method provided in this section, change from one nonaccrual-
experience method to another nonaccrual-experience method provided in
this section, and/or change to a periodic system (for further guidance,
for example, see Notice 88-51, 1988-1 C.B. 535, and Sec.
601.601(d)(2)(ii)(b) of this chapter), must follow the administrative
procedures issued under Sec. 1.446-1(e)(3)(ii) for obtaining the
Commissioner's automatic consent to a change in accounting method (for
further guidance, for example, see Rev. Proc. 2002-9, 2002-1 C.B. 327,
and Sec. 601.601(d)(2)(ii)(b) of this chapter).
(ii) Scope limitations. Any limitations on obtaining the automatic
consent of the Commissioner do not apply to a taxpayer that wants to
change to a nonaccrual-experience method of accounting provided in this
section, and/or change to a periodic system (for further guidance, for
example, see Notice 88-51, 1988-1 C.B. 535, and Sec.
601.601(d)(2)(ii)(b) of this chapter), for either its first or second
taxable year ending after March 9, 2002, provided the taxpayer's
nonaccrual-experience method of accounting is not an issue under
consideration for taxable years under examination at the time the Form
3115 is filed with the national office. A taxpayer's nonaccrual-
experience method of accounting is an issue under consideration for the
taxable years under examination if the taxpayer receives written
notification (for example, by examination plan, information document
request (IDR), or notification of proposed adjustments or income tax
examination changes) from the examining agent(s) specifically citing
the treatment of the nonaccrual-experience method of accounting as an
issue under consideration.
(iii) Form 3115 must be completed. When filing the Form 3115, the
taxpayer
[[Page 52507]]
must complete all applicable parts of the form and write ``Automatic
Change to Nonaccrual-Experience Method'' at the top of the form.
(4) Certain concurrent changes--(i) Taxpayers concurrently changing
to an accrual method of accounting--(A) Automatic consent. Taxpayers
that want to change to a nonaccrual-experience method of accounting for
the same taxable year for which they are required to change to an
accrual method of accounting under section 448 and the regulations
thereunder may concurrently change their method of accounting to a
nonaccrual-experience method (with or without also changing to a
periodic system (for further guidance, for example, see Notice 88-51,
1988-1 C.B. 535, and Sec. 601.601(d)(2)(ii)(b) of this chapter)),
under this paragraph (g)(4)(i) with automatic consent of the
Commissioner if they otherwise qualify under this section to use a
nonaccrual-experience method of accounting. Taxpayers changing to a
nonaccrual-experience method under this paragraph (g)(4)(i) must comply
with the provisions of Sec. 1.448-1(h)(2). Moreover, such taxpayers
must type or legibly print the following statement at the top of page 1
of Form 3115, ``Automatic Change to Nonaccrual-Experience Method and
Overall Accrual Method.'' The consent of the Commissioner to change to
a nonaccrual experience method is granted to taxpayers changing to such
method under this paragraph (g)(4)(i).
(B) Section 481(a) adjustment. In the case of a taxpayer changing
to a nonaccrual-experience method under this paragraph (g)(4)(i), the
section 481(a) adjustment resulting from the change to a nonaccrual-
experience method of accounting will be combined or netted with the net
section 481(a) adjustment resulting from the change under Sec. 1.448-
1(h)(2), and the resulting net section 481(a) adjustment will be taken
into account over the section 481(a) adjustment period as determined
under the applicable administrative procedures issued under Sec.
1.446-1(e)(3)(ii) for obtaining the Commissioner's consent to a change
in accounting method.
(ii) Taxpayers concurrently changing to a permissible special
method--(A) Prior consent. A taxpayer required to change to an accrual
method of accounting under section 448 and the regulations thereunder
that, as part of such change, also wants to change to a nonaccrual
experience method of accounting and a permissible special method of
accounting under Sec. 1.448-1(h)(3), may concurrently change its
method of accounting to a nonaccrual-experience method of accounting
(with or without also changing to a periodic system (for further
guidance, for example, see Notice 88-51, 1988-1 C.B. 535, and Sec.
601.601(d)(2)(ii)(b) of this chapter)), under this paragraph (g)(4)(ii)
with the prior consent of the Commissioner if the taxpayer otherwise
qualifies under this section to use a nonaccrual-experience method of
accounting. Taxpayers changing to a nonaccrual-experience method under
this paragraph (g)(4)(ii) must comply with the provisions of Sec.
1.448-1(h)(3). Moreover, such taxpayers must type or legibly print the
following statement at the top of page 1 of Form 3115, ``Change to
Nonaccrual-Experience Method and Special Method of Accounting--Section
448.''
(B) Section 481(a) adjustment. The section 481(a) adjustment
resulting from a change in method of accounting described under this
paragraph (g)(4)(ii) must be taken into account in accordance with the
rules provided in paragraph (g)(4)(i)(B) of this section.
(h) Transition rules--(1) In general. If a taxpayer adopted or
changed to a nonaccrual-experience method of accounting in accordance
with the provisions of Notice 2003-12 for any taxable year ending after
March 9, 2002, and, on or before October 20, 2003, and for such taxable
year the taxpayer would like to change to a different nonaccrual-
experience method of accounting as provided in paragraphs (e)(2)
through (e)(6) of this section, and/or change to a periodic system (for
further guidance, for example, see Notice 88-51, 1988-1 C.B. 535, and
Sec. 601.601(d)(2)(ii)(b) of this chapter), the taxpayer must follow
the administrative procedures issued under Sec. 1.446-1(e)(3)(ii) for
obtaining the Commissioner's automatic consent to a change in
accounting method (for further guidance, for example, see Rev. Proc.
2002-9, 2002-1 C.B. 327, and Sec. 601.601(d)(2)(ii)(b) of this
chapter) and must file the original Form 3115 either--
(i) With an amended federal income tax return (or a qualified
amended return under Rev. Proc. 94-69, 1994-2 C.B. 804, if applicable;
hereinafter, referred to in this section as a ``qualified amended
return'') on or before December 31, 2003, for the taxpayer's first
taxable year ending after March 9, 2002, and any affected subsequent
taxable year, and include the statement ``Filed Pursuant to Sec.
1.448-2T(h)(1)(i)'' at the top of any amended federal income tax return
(or qualified amended return);
(ii) With the taxpayer's timely filed federal income tax return for
the second taxable year ending after March 9, 2002, if this return has
not been filed on or before September 4, 2003; or
(iii) If the taxpayer's federal income tax return for the second
taxable year ending after March 9, 2002, was filed on or before
September 4, 2003, with an amended federal income tax return (or a
qualified amended return) on or before December 31, 2003, for the
second taxable year ending after March 9, 2002, and include the
statement ``Filed Pursuant to Sec. 1.448-2T(h)(1)(iii)'' at the top of
the amended federal income tax return (or qualified amended return).
(2) Pending Form 3115. If a taxpayer filed a Form 3115 under the
applicable administrative procedures with the national office to make a
change in its method of accounting under section 448(d)(5), as amended,
for a year of change for which this regulation is effective and the
application or ruling request is pending with the national office on
September 4, 2003, the taxpayer must notify the national office in
writing prior to November 3, 2003, if the taxpayer wants to withdraw
its Form 3115 under such administrative procedures. If the taxpayer
notifies the national office within the time provided in this paragraph
(h)(2), the taxpayer's Form 3115, and any user fee that was submitted
with the Form 3115, will be returned to the taxpayer. A taxpayer whose
Form 3115 is returned under this paragraph (h)(2) may file a new Form
3115 under the provisions prescribed in paragraphs (g) and (h) of this
section. If the taxpayer does not notify the national office within the
time provided in this paragraph (h)(2), the national office will
continue to process the taxpayer's Form 3115 in accordance with the
administrative procedures under which it was originally filed.
(i) [Reserved]
(j) Audit protection. If a taxpayer uses one of the nonaccrual-
experience methods of accounting described in paragraphs (e)(3) (actual
experience method), (e) (4) (modified Black Motor method), or (e)(5)
(modified six-year moving average method) of this section to determine
its amount excluded from gross income under section 448(d)(5), as
amended, the taxpayer's use of that method will not be raised as an
issue by the IRS in a taxable year that ends before September 4, 2003.
If the taxpayer uses one of the nonaccrual-experience methods of
accounting described in paragraphs (e)(3), (e)(4), or (e)(5) of this
section, and its use of such method is an issue under consideration in
examination (as defined in paragraph (g)(3)(ii) of this section), in
appeals, or before the U.S. Tax Court in a taxable year that ends
before September 4, 2003,
[[Page 52508]]
that issue will not be further pursued by the IRS.
(k) Effective date. This section is applicable for taxable years
ending after March 9, 2002. The applicability of this section expires
on or before September 5, 2006.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 4. In Sec. 602.101, paragraph (b) is amended by adding an entry
in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.448-2T................................................ 1545-1855
* * * * *
------------------------------------------------------------------------
Judith B. Tomaso,
Acting Deputy Commissioner for Services and Enforcement.
Approved: August 28, 2003.
Gregory Jenner,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-22458 Filed 9-3-03; 8:45 am]
BILLING CODE 4830-01-P