Comments on Rev. Proc. 97-27, relating to rules for obtaining consent to change accounting methods.

• Position: Tax Executives Institute, February 4, 1998

On February 4, 1998, Tax Executives Institute filed comments with Commissioner of Internal Revenue Charles O. Rossotti concerning IRS Rev. Proc. 97-27, which relates to the conditions and procedures for obtaining the Commissioner's consent for a change in a taxpayer's method of accounting for federal tax purposes. The new procedure substantially revises and replaces the predecessor guidance, Rev. Proc. 92-20. The Institute's comments were prepared under the aegis of TEI's Federal Tax Committee, whose chair is David L. Klausman, and coordinated by TEI's Federal Tax Subcommittee on Tax Accounting Periods, Methods, and Financial Reporting, whose chair is Larry J. Newsome of Echelon International. Margaret A. Curry of General Motors Corporation contributed substantially to the development of TEI's comments.

This letter is in response to the release of Rev. Proc. 97-27, relating to the conditions and procedures for obtaining the Commissioner's consent for a change in a taxpayer's method of accounting for federal income tax purposes. The new procedure revises, and generally improves, the predecessor guidance, Rev. Proc. 92-20, by adopting a number of changes recommended in public comments submitted in response to Notice 96-40. We are pleased to provide following comments on Rev. Proc. 97-27.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our more than 5,000 members represent the 2,700 leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible or managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by Rev. Proc. 97-27, relating to the rules for changing accounting methods with the consent of the Commissioner.

Overview of Rev. Proc. 97-27

In Rev. Proc. 97-27, the ERS has set forth revised procedures that a taxpayer must employ in order to obtain the consent of the Commissioner to a change in a method of accounting for federal income tax purposes. The purpose of the procedure is to provide incentives to taxpayers to encourage prompt voluntary compliance with proper tax accounting principles and to simplify many of the complex rules and requirements set forth in Rev. Proc. 92-20.

Generally, TEI commends the IRS for improving and simplifying the procedures for securing consent for changes in accounting method. Indeed, many of the significant revisions summarized in section 1.03 of the procedure comport with recommendations in public comments submitted in response to Notice 96-40, including those made by TEL Specifically, the new procedure simplifies the requirements for obtaining the consent of the Commissioner, stream lines the filing process, and eliminates much complexity. One example of a major simplification and improvement is the elimination of the Category A, Category B, Designated A, and Designated B classifications for methods of accounting. In addition, the adoption of a generally uniform period for spreading the section 481 adjustment to prevent omissions or duplications from taxable income will, we believe, substantially enhance voluntary compliance by simplifying the process even though, depending on the taxpayer's facts and circumstances, there will likely be "winners and losers."

We have reservations, however, about some aspects of the new procedure. Indeed, a number of deficiencies identified under Rev. Proc. 92-20 have been carried over into Rev Proc. 97-27. Moreover, the new procedure adopts a novel and, to our mind's eye, unwarranted expansion of the definition of what constitutes a change in accounting method.

Change In "Character" of an Item as a Change in Method of Accounting

Section 2.01(3) of the procedure states in part:

A change in the characterization

of an item may also constitute a

change in method of accounting if the

change has the effect of shifting

income from one period

to another. For example, a

change from treating an item

as income to treating the

item as a deposit is a change

in method of accounting.

[Citing Rev. Proc. 91-31,

1991-C.B. 566 as authority

for the statement.]

TEI believes that...