CHANGES IN METHODS OF ACCOUNTING

Q-47: If, as a result of the amendment of section 460 by the 1988 Act, a taxpayer wishes to change from the percentage of completion-capitalized cost method to the percentage of completion method, in what circumstances may the taxpayer do so without obtaining the consent of the Commissioner?

A-47: For purposes of section 460 of the Code, any taxpayer using a method of

accounting other than the percentage of completion method as its normal method of accounting for long-term contracts (e.g., a taxpayer using the completed contract, cash or an accrual method of accounting) may automatically change its method of accounting to the percentage of

completion method (including, if elected, the simplified cost-to-cost method) for --

1) all items under all long-term contracts entered into by the taxpayer after June 20, 1988; or

2) all items under all long-term contracts entered into by the taxpayer after October 13, 1987; or

3) all items under all long-term contracts entered into by the taxpayer after February 28, 1986.

The effect of alternative (2), regarding contracts entered into after October 13, 1987, is to extend the time period set forth in Notice 88-66 within which taxpayers may elect to use the percentage of completion method for all such contracts. The effect of alternative (3), regarding contracts entered into after February 28, 1986, is to extend the period, initially set forth in Notice 87-61, within which taxpayers may elect to use the percentage of completion method for all such contracts. Thus, for example, a taxpayer may use the percentage of completion-capitalized cost method for all contracts entered into after February 28, 1986 and before June 21, 1988, and may, under the terms of this notice, automatically (i.e., without requesting the consent of the

Commissioner) change its method of accounting to the percentage of completion method for all long-term contracts entered into after June 20, 1988. Alternatively, a taxpayer may, under the terms of this notice, use the percentage of completion-capitalized cost method for all contracts entered into after February 28, 1986, and before October 14, 1987, and may, under the terms of this notice, automatically change its method of accounting to the percentage of completion method for all items under all contracts entered into after October 13, 1987. In addition, a taxpayer may, under the terms of this notice, use the percentage of completion method for all items under all long-term contracts entered into after February 28, 1986.

This automatic change in method of accounting for long-term contracts is conditioned on the filing of an amended return for any affected tax year for which a Federal income tax return has been filed (subject to the applicable statute of limitations). The period for filing amended returns for taxpayers changing their method of accounting to the percentage of completion method is provided in Q&A-49 of this notice. Any taxpayer changing its method under this Q&A-47 must follow the notification procedure in Q&A-49.

Any automatic change to a method of accounting permitted under this Q&A-47 shall be effectuated by using a "cut-off" method with respect to contracts entered into after February 28, 1986, or October 13, 1987, or June 20, 1988, as the case may be. Thus, there is no change in the accounting method used with respect to any contract entered into before the applicable effective date, and the taxpayer shall not compute a section 481(a) adjustment with respect to its use of the new method of accounting.

Any change in method of accounting to the percentage of completion method other than a change for --

1) all items under all long-term contracts entered into by the taxpayer after February 28, 1986, or

2) all items under all long-term contracts entered into by the taxpayer after October 13, 1987, or

3) all items under all long-term contracts entered into by the taxpayer after June 20, 1988, will constitute a change in method of accounting that requires the consent of the Commissioner. For example, if a calendar year taxpayer wishes to change from the percentage of

completion-capitalized cost method to the percentage of completion method for its taxable year beginning on January 1, 1989, such taxpayer is required to obtain the consent of the

Commissioner with respect to such change in method of accounting. Moreover, in such a situation, anychange in method of accounting approved by the Commissioner (and any resulting section 481(a) adjustment) shall not consist, in whole or in part, of a change in method of accounting required to initially comply with section 460. Therefore, any resulting adjustment computed pursuant to section 481(a) shall relate only to a change from one proper method under section 460 to another proper method under section 460. See Q&A-13 for rules regarding taxpayers that had not complied with section 460 prior to requesting a change in their method of accounting for long-term contracts.

Q-48: What procedures should taxpayers follow to effectuate (1) the change in the percentage of completion-capitalized cost method of accounting from the 70/30 method to the 90/10 method required by the 1988 Act, and (2) the change in method of accounting for home construction contracts pursuant to the 1988 Act?

A-48: These changes shall be effectuated by using a "cut-off" method with respect to contracts entered into after June 20, 1988, i.e., the taxpayer shall not change its method of accounting for contracts entered into before June 21, 1988, and no adjustment under section 481(a) of the Code shall be computed. Taxpayers making these changes shall follow the notification procedures in Q&A-49 of this notice.

Q-49: What notification and filing procedures should be followed by taxpayers changing methods of accounting under either Q&A-47 or Q&A-48 of this notice?

A-49: Any taxpayer described in Q&A-47 or Q&A-48 of this notice shall complete and file a statement notifying the Internal Revenue Service of its use of the various methods of accounting (including the simplified cost-to-cost method) permitted under this notice with the taxpayer's Federal income tax return for the first taxable year ending after June 20, 1988, for which the taxpayer is required to account under section 460 for long-term contracts. The

taxpayer shall type or legibly print the following language at the top of the statement required to be filed: "NOTIFICATION PROCEDURES UNDER SECTION XI OF NOTICE 89-15." Any amended return filed by a taxpayer for the purpose, in whole or in part, of changing the

taxpayer's method of accounting under Q&A-47 must be filed on or before August 14, 1989. The taxpayer shall type or legibly print the following language at the top of each amended return: "NOTIFICATION PROCEDURES UNDER SECTION XI OF NOTICE 89-15."

Notwithstanding the requirements of the preceding paragraph, if a taxpayer has (i) filed a Federal income tax return on which the statement described in the preceding paragraph was

required to be included, (ii) failed to file the statement described in the preceding paragraph with such return, and (iii) otherwise properly used the method of accounting as required or allowed under this notice (including Q&A-47 and Q&A-48), the taxpayer may file a statement indicating the use of its method of accounting under the following procedures. This statement must be attached to the taxpayer's first Federal income tax return filed after May 15, 1989, for which the taxpayer is required to account under section 460 for long-term contracts. (A taxpayer, at its option, may attach the statement with any return filed before May 16, 1989.) The taxpayer shall type or legibly print the following language at the top of the statement required to be filed: "NOTIFICATION PROCEDURES UNDER SECTION XI OF NOTICE 89-15."