This Directive announces the Department's automatic approval process for chapter 62 taxpayers, i.e., individuals, including shareholders of S corporations and partners in partnerships, as well as trusts and corporate trusts, that wish to change their method of accounting for Massachusetts tax purposes. This automatic approval is available in all situations where an automatic change in methods is properly made for federal purposes.

ISSUE: What procedure must a chapter 62 taxpayer follow in order to obtain the Commissioner's automatic approval to change its accounting method for Massachusetts purposes for the current taxable year?

DIRECTIVE: If a chapter 62 taxpayer requesting permission to change an accounting method for Massachusetts purposes is eligible for an automatic change of accounting method federally, and has correctly followed the most recently issued federal revenue procedure for requesting an automatic change, [1] then the taxpayer should file its annual return using the new method and write at the top, "Automatic Change of Accounting Method - Filed in compliance with DOR Directive 02-13 ." The taxpayer should include a copy of federal Form 3115, together with any required statements attached. Like the IRS, the Commissioner will be deemed to have automatically approved such request.

If a chapter 62 taxpayer requesting permission to change an accounting method for Massachusetts purposes has formally requested the permission of the Internal Revenue Service (IRS) National Office to make the change, under the standard (non-automatic) procedures of Rev. Proc. 97-27, then the taxpayer, if the change is approved federally, should file its Massachusetts return for the taxable year together with a copy of federal Form 3115, any and all statements required to be filed federally and a copy of the IRS notice of approval for the change in accounting method.

DISCUSSION: The Massachusetts personal income tax statute, chapter 62, defines gross income as federal gross income with certain modifications not relevant here. G.L. c. 62, § 1(d). Chapter 62 taxpayers determine their taxable income for Massachusetts tax purposes by referring to their federal gross income for the taxable year as defined under the Internal Revenue Code. G.L. c. 62, §§ 1, 8, 17, 17A. When any of these individuals or entities change accounting methods for federal tax purposes, they must make a similar change for Massachusetts purposes. However, "[a]ny taxpayer who changes the method of accounting regularly employed by him in keeping his books shall not be permitted to report his income on a method different from that used for the preceding year without obtaining the consent of the Commissioner." G.L. c. 62, § 62 (emphasis supplied).

A chapter 62 taxpayer must use the same method of accounting in Massachusetts as it does federally. If, during the preceding taxable year, a chapter 62 taxpayer conducted business using one method of accounting for federal tax purposes, and for the current taxable year would like to change its accounting method, the taxpayer must follow either the procedure for requesting automatic approval of an accounting method change, or the standard procedure for requesting an accounting method change under Rev. Proc. 97-27.

Accordingly, the taxpayer must first determine whether it qualifies for automatic approval to change its method of accounting under the automatic change procedure. At the time this directive was signed, a taxpayer would consult Rev. Proc. 2002-9, as modified by Rev. Proc. 2002-19, to determine its eligibility for automatic approval of a change in accounting method. The Appendix of Rev. Proc. 2002-9 lists the various accounting method changes to which the automatic approval procedure applies. Automatic changes are typically made by filing Form 3115, Application for Change in Accounting Method. See Rev. Proc. 2002-9, § 6.02 for a listing of the requirements that must be met in order to properly file an automatic change request.

If the particular voluntary change in accounting method being requested is not covered by the most recently issued federal revenue procedure for requesting an automatic change, the taxpayer must formally request the permission of the IRS National Office to make the change by following the standard (non-automatic) change procedure of Rev. Proc. 97-27. [2] This procedure is similar to the procedure for requesting a letter ruling. Generally, such applications are filed on federal Form 3115 before the last day of the taxable year. Treas. Regs. § 1.446-1(e)(3); Rev. Proc. 97-27, § 5.01. After receiving the request and screening for the appropriate user fee, the IRS National Office studies the taxpayer's request, asks for any necessary additional information, and then issues its letter ruling.

/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue

ALL:DMS:wm

October 1, 2002

DD 02-13



[1] When this Directive was signed, the most recently issued federal revenue procedure for requesting an automatic change of accounting method was Rev. Proc. 2002-9, as modified by Rev. Proc. 2002-19.

[2] The Commissioner will follow any revisions or modifications to Rev. Proc. 97-27.