Rp 2002-54

Part III. Administrative, Procedural, and Miscellaneous
Election to Include in Gross
Income Gain on Assets Held
on January 1, 2001
Notice 2002–58
This notice informs taxpayers that the
election under § 311(e) of the Taxpayer Relief Act of 1997 (TRA 97), 1997–4 (Vol. 1)
C.B. 1, 49–50 (as amended by § 314(c) of
P.L. 106–554 and § 414 of P.L. 107–147),
to treat certain assets held on January 1,
2001, as having been sold and then reacquired on that date is properly made by following the instructions for Form 4797, Sales
of Business Property, or Schedule D, Capital Gains and Losses, for Form 1040, 1120,
1120S, 1065, or 1041. Under appropriate
circumstances, the Internal Revenue Service will grant requests to make a late election under § 311(e) of TRA 97 and this
notice under § 301.9100–1 through
301.9100–3 of the Procedure and Administration Regulations.
Under § 1(h)(1) of the Internal Revenue Code, gain resulting from the sale or
exchange of most capital assets is taxed at
a capital gains rate of 20 percent (10 percent for gain otherwise taxed at an ordinary rate of 15 percent or less). Section
1(h)(2)(B) provides that the 20-percent capital gains rate is reduced to 18 percent for
qualified 5-year gain resulting from the sale
or exchange of property with a holding period beginning after December 31, 2000.
Qualified 5-year gain is defined generally
by § 1(h)(9) as “the aggregate long-term
capital gain from property held for more
than 5 years.”
Section 311(e) of TRA 97 allows a noncorporate taxpayer holding a capital asset
on January 1, 2001, to elect to treat that asset as having been both sold and reacquired on that date for an amount equal to
its fair market value (a § 311(e) election).
If a taxpayer makes a § 311(e) election, the
holding period for the elected asset begins after December 31, 2000. This makes
the asset eligible for the 18-percent rate if
it is later sold after having been held by the
taxpayer for more than 5 years from the
date of the deemed sale and reacquisition.
A taxpayer makes a § 311(e) election by
following the instructions for the appropriate Schedule D or Form 4797. Under

September 3, 2002

these instructions, the taxpayer must report the resulting gain in gross income on
the tax return for the tax year that includes
the date of the deemed sale and attach a
statement to the return stating that the election is being made under § 311(e) of TRA
97 and listing the assets for which the election is being made. The tax return on which
the gain is reported must be filed by its due
date, including extensions.
Pursuant to § 301.9100–2, taxpayers who
timely filed their tax returns without making the § 311(e) election for one or more
eligible assets may still make the election
by filing an amended return within 6
months of the due date of the original return, excluding extensions. One of the following statements must be written at the top
of the amended return: “Election Under
Section 311 of the Taxpayer Relief Act of
1997” or “FILED PURSUANT TO
§ 301.9100–2.”
If a taxpayer (i) did not timely file an
original return on which a § 311(e) election could have been made, as described
above, or (ii) failed to make a § 311(e) election with respect to one or more eligible assets on a timely-filed original return and
failed to make the § 311(e) election on an
amended return filed within 6 months of the
due date of that original return, then the taxpayer may apply for relief under
§ 301.9100–3, in accordance with the provisions of Rev. Proc. 2002–1, 2002–1 I.R.B.
1 (or any successor).
Drafting Information
The principal author of this notice is
Amy Pfalzgraf of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding
this notice, contact Ms. Pfalzgraf at (202)
622–4950 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part 1, §§ 263A, 446, 481; 1.263A–1,
1.263A–2, 1.263A–3, 1.446–1, 1.481–1, 1.481–4.)

Rev. Proc. 2002–54
SECTION 1. PURPOSE
.01 This revenue procedure amplifies and
clarifies Rev. Proc. 2002–19, 2002–13 I.R.B.

432

696, relating to changes in method of accounting under § 446 of the Internal Revenue Code. Rev. Proc. 2002–19 modifies
Rev. Proc. 97–27, 1997–1 C.B. 680, and
Rev. Proc. 2002–9, 2002–3 I.R.B. 327, (as
modified and clarified by Announcement
2002–17, 2002–8 I.R.B. 561), in part to reduce the § 481(a) adjustment period for net
negative § 481(a) adjustments for a change
from 4 years to 1 year, applicable generally to taxable years ending on or after December 31, 2001. Since the issuance of Rev.
Proc. 2002–19 on March 14, 2002, certain questions have arisen about the application of the new 1-year § 481(a)
adjustment period to pending or recently approved applications for changes in method
of accounting under Rev. Proc. 97–27 and
to applications filed under Rev. Proc.
2002–9.
.02 This revenue procedure also clarifies and modifies Rev. Proc. 2002–9, as
modified and clarified by Announcement
2002–17. Since the issuance of Rev. Proc.
2002–9 on January 7, 2002, the Internal
Revenue Service has received several comments regarding sections 4.01 and 4.02 of
the Appendix of Rev. Proc. 2002–9. Some
comments requested that certain provisions of these sections be clarified; other
comments suggested that the sections be
modified to include additional accounting
method changes. After consideration of
these comments, the Service is revising sections 4.01(1) through (4) and 4.02 of the
Appendix of Rev. Proc. 2002–9 to clarify
the scope of these provisions and to add certain accounting method changes.
In addition, this revenue procedure clarifies the intended operation of the transition rules contained in section 13.02 of Rev.
Proc. 2002–9.
SECTION 2. CERTAIN PENDING
APPLICATIONS UNDER REV. PROC.
97–27
.01 Rollover of Year of Change. The Service has determined that it is appropriate
to allow taxpayers with applications or ruling requests (“applications”) filed under
Rev. Proc. 97–27 for a year of change ending before December 31, 2001, and pending with the national office on March 14,
2002, to modify the application (or, if the
ruling letter has been issued since March
14, 2002, to request a new ruling letter) to

2002–35 I.R.B.

defer the year of change to the first taxable year ending on or after December 31,
2001, in order to take advantage of the
1-year § 481(a) adjustment period. To do so,
the taxpayer must notify the national office, prior to the later of December 13,
2002, or the issuance of the letter ruling
granting or denying the requested change,
of its intent to defer the year of change. The
taxpayer must submit any additional information requested by the national office.
.02 Modifications to Pending Applications. Section 4.04(2) of Rev. Proc. 2002–19
provides in part that the national office will
require taxpayers with method change applications under Rev. Proc. 97–27 for a year
of change ending on or after December 31,
2001, that are pending with the national office on March 14, 2002, to make “appropriate modifications” to the application to
comply with the provisions of Rev. Proc.
2002–19 (namely, the 1-year § 481(a) adjustment period). The national office will
notify taxpayers if and when such adjustments are required. Absent such notification, no further submissions are required.
SECTION 3. CERTAIN RECENTLY
ISSUED CONSENT AGREEMENTS
.01 In General. If a taxpayer has received a consent agreement for a change in
method of accounting for a year of change
ending on or after December 31, 2001, and
the agreement does not reflect a 1-year
§ 481(a) adjustment period for a net negative § 481(a) adjustment for the change, the
taxpayer may elect to apply the 1-year
§ 481(a) adjustment period of Rev. Proc.
2002–19 by complying with the requirements of this section. If a taxpayer does not
want to apply the 1-year § 481(a) adjustment period, or does not comply with the
requirements of this section, then the adjustment period reflected in the consent
agreement will apply.
.02 Signed and Returned Consent Agreements. If the taxpayer has signed and returned the consent agreement, the taxpayer
must write “Election to Apply 1-Year Adjustment Period” at the top of the first page
of a copy of the consent agreement and attach the copy to either its timely filed original federal income tax return or an amended
federal income tax return, which should reflect the 1-year adjustment period.
.03 Unsigned Consent Agreements. If the
taxpayer has not yet signed and returned the
consent agreement, the taxpayer should con-

2002–35 I.R.B.

tact the national office to request the issuance of a consent agreement that reflects
a 1-year § 481(a) adjustment period for its
net negative § 481(a) adjustment for the
change.
SECTION 4. CERTAIN
APPLICATIONS FILED UNDER
PREDECESSORS OF REV. PROC.
2002–9
An original application and/or a copy of
an application to change a method of accounting under Rev. Proc. 99–49, 1999–2
C.B. 725, superseded by Rev. Proc. 2002–9,
or any other predecessor of Rev. Proc.
2002–9, for a taxable year ending on or after December 31, 2001 will be treated as
an application and/or copy filed under Rev.
Proc. 2002–9 for purposes of the transition rules set forth in section 4.04(1) of Rev.
Proc. 2002–19.
SECTION 5. ADDITIONAL TIME TO
REQUEST A 4-YEAR § 481(a)
ADJUSTMENT PERIOD FOR
AUTOMATIC CONSENT.
The Service has determined that it is appropriate to allow taxpayers filing applications to change a method of accounting
under Rev. Proc. 2002–9 (or any predecessor) additional time to request the application of a 4-year § 481(a) adjustment
period for net negative § 481(a) adjustments for taxable years ending on or after December 31, 2001, and on or before
April 30, 2002. Accordingly, taxpayers that
qualify for, and comply with, the provisions of this section may request the application of the 4-year adjustment period for
net negative § 481(a) adjustments for taxable years to which the 1-year § 481(a) adjustment period would otherwise be
applicable under Rev. Proc. 2002–19.
A taxpayer requesting consent to change
its method of accounting under Rev. Proc.
2002–9 (or any predecessor) for a taxable
year ending on or after December 31, 2001,
and on or before April 30, 2002, that desires a 4-year § 481(a) adjustment period for
a net negative § 481(a) adjustment for the
change may request such adjustment period by preparing an application (or
amended application) in duplicate under
Rev. Proc. 2002–9 that clearly indicates that
the taxpayer elects the application of the
4-year § 481(a) adjustment period under this
section 5.

433

The original and copy of the application must be filed in accordance with the
timely duplicate filing requirements of section 6.02(3) of Rev. Proc. 2002–9.
The original of an amended application must be attached to an original return (or if an original return has already
been filed, to an amended return), which
should reflect the 4-year adjustment period. An amended return must be filed on
or before December 13, 2002. The copy of
an amended application must be labeled
“Substitute Application under Rev. Proc.
2002–54,” and must be filed with the national office no later than when the original return (or, if applicable, the amended
return) is filed.
SECTION 6. UNIFORM
CAPITALIZATION (UNICAP)
CHANGES UNDER REV. PROC.
2002–9
.01 This section 6 modifies sections
4.01(1) through 4.01(4) and 4.02 of the Appendix of Rev. Proc. 2002–9, as modified
and clarified by Announcement 2002–17.
The entire text of these provisions are set
forth as a convenience. However, changes
to the existing text of these provisions are
limited to sections 4.01(1)(a)(vi), 4.01(1)(b),
4.01(1)(c), the heading of 4.02, 4.02(1), and
4.02(2).
.02 Sections 4.01(1) through 4.01(4) of
the Appendix of Rev. Proc. 2002–9 are
modified to read as follows:
“.01 Certain uniform capitalization
(UNICAP) methods used by small resellers, formerly small resellers, and resellerproducers.
“(1) Description of change and scope.
“(a) Applicability. This change applies to:
“(i) a small reseller of personal
property changing from a permissible
UNICAP method to a permissible nonUNICAP inventory capitalization method
in any taxable year that it qualifies as a
small reseller;
“(ii) a formerly small reseller
changing from a permissible non-UNICAP
inventory capitalization method to a permissible UNICAP method in the first taxable year that it does not qualify as a small
reseller;
“(iii) a reseller-producer changing from a permissible UNICAP method for
both its production and resale activities to
a permissible simplified resale method de-

September 3, 2002

scribed in § 1.263A–3(d)(3) in any taxable year that it qualifies to use a simplified
resale method for both its production and
resale activities under § 1.263A–3(a)(4) (resellers with de minimis production activities);
“(iv) a reseller-producer changing from a permissible simplified resale
method described in § 1.263A–3(d)(3) for
both its production and resale activities to
a permissible UNICAP method for both its
production and resale activities in the first
taxable year that it does not qualify to use
a simplified resale method for both its production and resale activities under
§ 1.263A–3(a)(4);
“(v) a reseller that wants to
change its permissible UNICAP method to
include a special reseller cost allocation rule;
or
“(vi) a reseller changing to a
UNICAP method (or methods) specifically described in the regulations (and making any attendant changes in the
identification of costs subject to § 263A and
including any special reseller cost allocation rules) in any taxable year, other than
the first taxable year, that it does not qualify
as a small reseller. However, this does not
include a change for purposes of recharacterizing “section 471 costs” as “additional § 263A costs” (or vice versa) under
the simplified resale method.
“(b) Scope limitations inapplicable. A taxpayer that wants to make a
change described in sections 4.01(1)(a)(i)
through 4.01(1)(a)(v) of this APPENDIX is
not subject to the scope limitations in section 4.02 of this revenue procedure.
“(c) Inapplicability. This change
does not apply to a taxpayer making an historic absorption ratio election under
§§ 1.263A–2(b)(4) or 1.263A–3(d)(4), or
to a taxpayer that wants to revoke an election to use the historic absorption ratio with
the simplified resale method (see § 1.263A–
3(d)(4)(iii)(B)), including a taxpayer using the simplified resale method with an
historic absorption ratio changing to a
UNICAP method specifically described in
the regulations that does not include the historic absorption ratio.
“(2) Definitions.
“(a) “Reseller” means a taxpayer
that acquires real or personal property described in § 1221(1) for resale.
“(b) “Small reseller” means a reseller whose average annual gross receipts

September 3, 2002

for the three immediately preceding taxable years (or fewer, if the taxpayer has not
been in existence during the three preceding taxable years) do not exceed
$10,000,000. See § 263A(b)(2)(B).
“(c) “Formerly small reseller”
means a reseller that no longer qualifies as
a small reseller.
“(d) “Producer” means a taxpayer
that produces real or tangible personal property.
“(e) “Reseller-producer” means a
taxpayer that is both a producer and a reseller.
“(f) “Permissible UNICAP
method” means a method of capitalizing
costs that is permissible under § 263A.
“(g) “UNICAP method specifically described in the regulations” includes
the simplified service cost method using a
labor-based allocation ratio (§ 1.263A–
1(h)) and the simplified resale method without an historic absorption ratio election
(§ 1.263A–3(d)), but does not include any
other reasonable allocation method within
the meaning of § 1.263A–1(f)(4).
“(h) “Special reseller cost allocation rule” means the 90–10 de minimis rule
to allocate a mixed service department’s
costs to property acquired for resale
(§ 1.263A–1(g)(4)(ii)), the 1/3 – 2/3 rule to
allocate labor costs of personnel to purchasing activities (§ 1.263A–3(c)(3)(ii)(A)),
and the 90–10 de minimis rule to allocate
a dual-function storage facility’s costs to
property acquired for resale (§ 1.263A–
3(c)(5)(iii)(C)).
“(i) “Permissible non-UNICAP
inventory capitalization method” means a
method of capitalizing inventory costs that
is permissible under § 471.
“(3) Section 481(a) adjustment. Beginning with the year of change, a taxpayer changing its method of accounting for
costs pursuant to sections 4.01(1)(a)(i),
4.01(1)(a)(iii), or 4.01(1)(a)(iv) of this APPENDIX generally must take any applicable net positive § 481(a) adjustment into
account ratably over the same number of
taxable years, not to exceed four, that the
taxpayer used its former method of accounting. A taxpayer changing its method
of accounting for costs pursuant to sections 4.01(1)(a)(ii), 4.01(1)(a)(v) or
4.01(1)(a)(vi) of this APPENDIX generally must take any applicable net positive
§ 481(a) adjustment into account ratably

434

over four taxable years. See section 5.04(3)
of this revenue procedure for exceptions to
this general rule.
“(4) Multiple changes. Taxpayers
making both this change and another change
in method of accounting in the same year
of change must comply with the ordering
rules of § 1.263A–7(b)(2).”
.03 Section 4.02 of the Appendix of Rev.
Proc. 2002–9 is modified to read as follows:
“.02 Certain uniform capitalization
(UNICAP) methods used by producers and
reseller-producers.
“(1) Applicability. This change applies to a producer (as defined in section
4.01(2)(d) of the APPENDIX of this revenue procedure) or a reseller-producer (as
defined in section 4.01(2)(e) of the APPENDIX of this revenue procedure) that
wants to change to a UNICAP method (or
methods) specifically described in the regulations and includes any changes in the
identification of costs subject to § 263A
made in connection therewith. However, this
does not include a change for purposes of
recharacterizing “section 471 costs” as “additional § 263A costs” (or vice versa) under the simplified production method.
“(2) Inapplicability. This change does
not apply to a producer or reseller-producer
that wants to revoke an election to use the
historic absorption ratio with the simplified production method (see § 1.263A–
2(b)(4)(iii)(B)), including a taxpayer using
the simplified production method with an
historic absorption ratio changing to a
UNICAP method specifically described in
the regulations that does not include the historic absorption ratio.
“(3) Definition. A “UNICAP method
specifically described in the regulations” includes the 90–10 de minimis rule to allocate a mixed service department’s costs to
production or resale activities (§ 1.263A–
1(g)(4)(ii)), the 1/3 – 2/3 rule to allocate labor costs of personnel to purchasing
activities (§ 1.263A–3(c)(3)(ii)(A)), the 90
– 10 de minimis rule to allocate a dualfunction storage facility’s costs to property acquired for resale (§ 1.263A–
3(c)(5)(iii)(C)), the specific identification
method (§ 1.263A–1(f)(2)), the burden rate
method (§ 1.263A–1(f)(3)), the standard cost
method (§ 1.263A–1(f)(3)), the direct reallocation method (§ 1.263A–1(g)(4)
(iii)(A)), the step-allocation method
(§ 1.263A–1(g)(4)(iii)(B)), the simplified
service-cost method (with either a labor-

2002–35 I.R.B.

based allocation ratio or a production cost
allocation ratio) (§ 1.263A–1(h)), and the
simplified production method without the
historic absorption ratio election (§ 1.263A–
2(b)), but does not include any other reasonable allocation method within the
meaning of § 1.263A–1(f)(4).
“(4) Multiple changes. Taxpayers
making both this change and another change
in method of accounting in the same year
of change must comply with the ordering
rules of § 1.263A–7(b)(2).”
SECTION 7. TRANSITION RULES OF
REV. PROC. 2002–9.
Section 13.02 of Rev. Proc. 2002–9 provides that if a taxpayer filed an application with the national office for change in
method of accounting described in the APPENDIX of Rev. Proc. 2002–9 for a year
of change for which Rev. Proc. 2002–9 is
effective, and the application is pending
with the national office on January 7, 2002,
the taxpayer may instead make the change
under Rev. Proc. 2002–9, provided that the
taxpayer notifies the national office of its
intent to do so prior to the later of February 15, 2002, or the issuance of the letter
ruling granting or denying consent to the
change. If such a taxpayer chooses to make
the change under Rev. Proc. 2002–9, section 13.02 requires the taxpayer to make any
appropriate modifications to the application to comply with the applicable provisions of Rev. Proc. 2002–9. In some cases,
the national office retains the application,
and the taxpayer makes the necessary modifications by submitting supplementary representations to the national office. In other
cases, the national office returns the application to the taxpayer, and the taxpayer
makes the necessary modifications to the
application before resubmitting it to the national office.
Applications that are retained by the national office are considered to be converted
to applications under Rev. Proc. 2002–9 if
the taxpayer submits the necessary supplementary representations to the national office within 30 days of the Service’s first
request for such representations. Applications that are returned to the taxpayer for
necessary modifications are considered to
be converted to applications under Rev.
Proc. 2002–9 if the taxpayer resubmits to
the national office the application with the
appropriate modifications within 30 days after the Service returns the application to the

2002–35 I.R.B.

taxpayer. Whether the national office retains or returns the application, the date on
which the taxpayer originally filed the application with the national office is treated
as the date on which the application under Rev. Proc. 2002–9 is filed with the national office for purposes of that revenue
procedure. Taxpayers using the transition
rule are reminded to attach a copy of the
modified application to their federal income tax return for the year of change. See
section 6.02(3) of Rev. Proc. 2002–9.
EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2002–9 is amplified, clarified and modified. Rev. Proc. 2002–19 is
amplified and clarified.
EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after December 31, 2001.
FURTHER INFORMATION
For further information regarding this
revenue procedure, contact Grant D.
Anderson of the Office of Associate Chief
Counsel (Income Tax and Accounting) at
(202) 622–4970 (not a toll-free call).

Audit Guidance for External
Auditors of Qualified
Intermediaries
Rev. Proc. 2002–55
SECTION 1. PURPOSE AND SCOPE
This Revenue Procedure contains final
Audit Guidance for an external auditor engaged by a qualified intermediary (QI) to
verify the QI’s compliance with the withholding agreement entered into with the Internal Revenue Service (IRS) pursuant to
Rev. Proc. 2000–12, 2000–1 C.B. 387 and
Treasury Regulation § 1.1441–1(e)(5) (QI
Agreement). Under its QI Agreement, the
QI generally must report annually certain
aggregate information concerning the beneficial owners of U.S. source payments and
make any necessary tax payments to the
IRS. In lieu of an IRS audit, the QI may
engage an external auditor to conduct an audit to determine whether it is complying
with the withholding and reporting obli-

435

gations covered by the QI Agreement. The
external auditor must conduct its audit in
accordance with the procedures described
in section 10 of the QI Agreement. This
Revenue Procedure is intended to assist the
external auditor in understanding and applying those procedures. This Revenue Procedure does not amend, modify, or interpret
the QI Agreement.
SECTION 2. BACKGROUND
.01 Comments on Proposed Guidance.
The IRS issued proposed audit procedures
for external auditors in Notice 2001–66,
2001–44 I.R.B. 396. Because the IRS and
Treasury recognize that the audit process
must be implemented in a manner that
maintains the cooperative nature and effectiveness of the QI system, the IRS engaged in a lengthy dialogue with the
financial community following the issuance of Notice 2001–66 to consider ways
to implement the audit procedures so as to
minimize cost to the QI while preserving
the compliance goals of the withholding
regulations.
.02 IRS Response to Five Areas of Concern. The majority of the comments on Notice 2001–66 reflected concerns about cost
in the context of one or more of the following areas: availability of waivers, scope
of audit coverage, statistical sampling, projection of underwithholding over the QI’s
account population based on the statistical sample, and use of an internal audit. The
following is a brief overview of the modifications reflected in the attached Audit
Guidance in response to these comments.
A more complete discussion is set forth in
Section 4 of this Revenue Procedure.
(i) Waivers.
The financial community commented
that the criteria for obtaining a waiver from
an external audit were too stringent. In response, the following changes have been
made:
• The monetary threshold in Waiver One
has been increased in the attached Audit Guidelines from $250,000 to
$1,000,000 and is based on reportable amounts.
• Waiver Two (which in Notice 2001–66
was based on number of accounts)
now is based on whether the QI received between $1,000,000 and
$4,000,000 in reportable amounts.
• With respect to the reconciliation of
Forms 1042–S and 1099 issued to and
by the QI, which are required to re-

September 3, 2002