[17104]
February 19, 2004
TO: TAX MEMBERS No. 9-04
ACCOUNTING/TREASURERS MEMBERS No. 7-04
ADVISER DISTRIBUTOR TAX ISSUES TASK FORCE No. 3-04
RE: CHANGE IN ACCOUNTING METHOD PROCEDURES UNDER FINAL
CAPITALIZATION REGULATIONS
As we have previously informed you, the final regulations on the capitalization of
intangible assets (the “Regulations”) include provisions granting the Commissioner’s consent to
a change in accounting method to comply with the final regulations.1 This automatic consent is
available for the taxpayer’s first taxable year ending on or after December 31, 2003, provided the
taxpayer follows the administrative procedures for obtaining automatic consent. The Service
has indicated that it intends to issue further guidance on obtaining automatic consent under
these provisions in the future.
Generally, a taxpayer intending to obtain automatic consent for a change must file a
completed Form 3115 with its timely filed (including extensions) tax return for the year of
change (as well as a duplicate copy with the National Office by the same date). There is no fee
for filing for an automatic change, and the Regulations do not limit who may file for an
automatic change (e.g., being under examination is no bar to filing), but late forms will not be
accepted except in “unusual or compelling circumstances.”
The Regulations generally impose a “modified cut-off” transition rule.2 Under this
approach, a taxpayer who changed its method of accounting for its first taxable year ending on
or after December 31, 2003, would make an adjustment for all amounts paid or incurred in tax
years ending on or after January 24, 2002. Thus, in the case of distributor commissions, a
taxpayer changing its method of accounting would include in its Section 481(a) adjustment
unamortized commissions from tax years 2002 and 2003, but would continue to amortize any
commissions incurred in tax year 2001. Under Rev. Proc. 2002-9, as amended by Rev. Proc.
2002-19, the general rule is that a net negative (i.e., taxpayer-favorable) Section 481(a)
adjustment is taken entirely in the year of the change.3
1 See Institute Memorandum to Tax Members No. 68-03, Accounting/Treasurers Members No. 63-03, and Adviser
Distributor Tax Issues Task Force No. 19-03 [16924], dated December 30, 2003.
2 With regard to pooling methods, the Regulations impose a cut-off method.
3 A net positive adjustment is taken over four taxable years.
2
The requirement to file for an automatic consent applies to any change in accounting
method authorized under the final regulations, such as treatment of distributor commissions
and fund start-up expenses (including employee compensation).
David Orlin
Assistant Counsel