IRS PROVIDES PROCEDURE FOR OBTAINING CONSENT TO CHANGE METHOD OF ACCOUNTING FOR COSTS UNDER UNICAP RULES.

Rev. Proc. 95-33

CONTENTS

This revenue procedure provides the exclusive procedure for a "small reseller," a "formerly small reseller," or a "reseller- producer" within the scope of this revenue procedure (as provided in section 4) to obtain consent to change its method of accounting for costs subject to section 263A of the Internal Revenue Code (the "UNICAP method"). A taxpayer complying with all the applicable provisions of this revenue procedure will be deemed to have obtained the consent of the Commissioner of Internal Revenue to change its method of accounting under section 446(e).

SECTION 2 DEFINITIONS

.01 "Reseller" means a taxpayer that acquires real or personal property described in section 1221(1) for resale.

.02 "Small reseller" means a reseller whose average annual gross receipts 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.

.03 "Formerly small reseller" means a reseller that no longer qualifies as a small reseller.

.04 "Producer" means a taxpayer that produces real or tangible personal property.

.05 "Reseller-producer" means a taxpayer that is both a producer and a reseller.

.06 "Permissible UNICAP method" means a method of capitalizing costs that is permissible under section 263A.

.07 "Permissible non-UNICAP inventory capitalization method" means a method of capitalizing inventory costs that is permissible under section 471.

SECTION 3. BACKGROUND

.01 Section 263A of the Internal Revenue Code generally requires producers of real or tangible personal property and resellers of real or personal property described in section 1221(1) to capitalize the direct costs of such property and certain indirect costs allocable to such property, including "additional section 263A costs."

.02 "Additional section 263A costs" are the indirect costs, other than interest, that must be capitalized under section 263A, but that were not capitalized under the taxpayer's method of accounting immediately prior to the effective date of section 263A.

.03 Sections 1.263A-2(b) and 1.263A-3(d) provide a simplified production method and a simplified resale method, respectively, for determining the additional section 263A costs that must be capitalized to ending inventory (or to the current-year increment in the case of a taxpayer using the last-in, first-out (LIFO) inventory method) or other property on hand at the end of the year. Under these simplified methods, a taxpayer determines the additional section 263A costs that must be capitalized by multiplying section 471 costs (as defined in section 1.263A-1(d)(2)) remaining on hand at year end (or reflected in the current-year increment in the case of a taxpayer using the LIFO inventory method) by an absorption ratio. In general, the absorption ratio is total additional section 263A costs incurred during the taxable year, divided by total section 471 costs incurred during the taxable year.

.04 Section 1.263A-2(b)(2) provides that a taxpayer electing to use a simplified production method for any trade or business generally must use a simplified production method for all production and resale activities. Section 1.263A-3(a)(4)(ii) provides, however, that a reseller-producer otherwise permitted to use a simplified resale method may use a simplified resale method if its production activities are considered de minimis under section 1.263A- 3(a)(2)(iii) and are incident to its resale of personal property described in section 1221(1). In addition, section 1.263A- 3(a)(4)(iii) provides that a reseller-producer otherwise permitted to use a simplified resale method may use a simplified resale method for personal property produced for it under a contract with an unrelated person if the taxpayer enters into the contract incident to its resale activities and the property is sold to its customers.

.05 Sections 263A(b)(2)(B) and 1.263A-3(b)(1) provide that the UNICAP method does not apply to any personal property acquired for resale during any taxable year if the taxpayer's average annual gross receipts for the three previous taxable years do not exceed $10 million. Section 1.263A-3(a)(3) provides that a small reseller is not required to capitalize additional section 263A costs associated with any personal property acquired for resale, including personal property produced for the taxpayer under a contract with an unrelated person if the taxpayer enters into the contract incident to its resale activities and the property is sold to its customers. In addition, section 1.263A-3(a)(2)(ii) provides that a small reseller is not required to capitalize additional section 263A costs associated with any personal property that the taxpayer produces incident to its resale activities if the production activities are considered de minimis under section 1.263A-3(a)(2)(iii).

.06 Section 1.263A-7T(e)(11)(i) of the temporary Income Tax Regulations (formerly section 1.263A-1T(e)(11)(i)) provides that a taxpayer who is required to change its method of accounting under section 263A may change automatically under the provisions of section 1.263A-7T(e)(11). The regulation further provides, however, that the Commissioner may prescribe additional procedures, at the time and in the manner that the Commissioner may determine, for a taxpayer seeking to change its method of accounting under section 1.263A- 7T(e)(11).

.07 Sections 446(e) and 1.446-1(e)(2)(i) state that, except as otherwise expressly provided, a taxpayer must obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes.

.08 Section 1.446-1(e)(3)(i) requires that in order to obtain this consent, a Form 3115, Application for Change in Accounting Method, generally must be filed within 180 days after the beginning of the taxable year in which the proposed change is to be made.

.09 Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change its method of accounting in accordance with section 446(e).

.10 Section 481(a) requires that those adjustments necessary to prevent amounts from being duplicated or omitted must be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year.

.11 Sections 481(c) and 1.481-5 provide that the adjustments required by section 481(a) must be taken into account in determining taxable income in the manner and subject to the conditions agreed to by the Commissioner and the taxpayer.

.12 Rev. Proc. 92-20, 1992-1 C.B. 685, provides the general procedures under section 1.446-1(e) for obtaining the consent of the Commissioner to change a method of accounting for federal income tax purposes. Section 2.04 of Rev. Proc. 92-20 provides that, unless other published guidance provides terms and conditions that must be used in making a specific type of accounting method change, a change in method of accounting will be made pursuant to the terms and conditions provided in Rev. Proc. 92-20.

.13 Rev. Proc. 94-49, 1994-30 I.R.B. 31, provides an automatic consent procedure for a taxpayer changing its method of accounting under sections 1.263A-1, 1.263A-2, and 1.263A-3 for its first taxable year beginning on or after January 1, 1994. However, section 3.02(4) of Rev. Proc. 94-49 expressly excludes from the scope of its automatic consent procedures any changes in method of accounting for a taxpayer that subsequently qualifies as a small reseller or that subsequently ceases to qualify as a small reseller.

SECTION 4. SCOPE

.01 Except as provided in sections 4.02, 4.03, or 4.04 below, this revenue procedure applies to:

(1) a small reseller of personal property changing from a permissible UNICAP method to a permissible non-UNICAP inventory capitalization method in any taxable year that it qualifies as a small reseller;

(2) 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;

(3) a reseller-producer changing from a permissible UNICAP method for both its production and resale activities to a simplified resale method in any taxable year that it qualifies under section 1.263A-3(a)(4) to use a simplified resale method for both its production and resale activities; and

(4) a reseller-producer changing from a simplified resale method 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 under section 1.263A-3(a)(4) to use a simplified resale method for both its production and resale activities.

.02 This revenue procedure does not apply to a taxpayer making a historic absorption ratio election under section 1.263A-2(b)(4) or 1.263A-3(d)(4). See Rev. Proc. 95-25, 1995-18 I.R.B. 13, for a taxpayer making a historic absorption ratio election during the three-year transition period for taxable years beginning on or after January 1, 1994.

.03 This revenue procedure does not apply to any change in accounting method, except to the extent necessary to effect the changes described in section 4.01 of this revenue procedure. See Rev. Proc. 92-20 for the general rules regarding changes in accounting methods.

.04 This revenue procedure does not apply to a taxpayer that is the subject of a pending criminal investigation or proceeding concerning (1) any issue directly or indirectly related to the taxpayer's federal tax liability for any taxable year, or (2) the possibility of false or fraudulent statements made by the taxpayer regarding any issue related to its federal tax liability for any taxable year, unless the taxpayer obtains the written consent of Criminal Investigation to change its method under this revenue procedure. The taxpayer must attach the written consent from Criminal Investigation to its Form 3115 required by section 5.02.

SECTION 5. APPLICATION

.01 Consent. In accordance with section 1.446-1(e)(3)(ii), the requirement to file an application on Form 3115 within the 180-day period is waived for any application for change in method of accounting filed pursuant to this revenue procedure. In addition, under section 1.446-1(e)(2)(i), the consent of the Commissioner is hereby granted to any taxpayer within the scope of this revenue procedure to change its method of accounting for costs subject to section 263A. This consent is conditioned, however, on the taxpayer filing a current Form 3115 in the manner described in section 5.02 of this revenue procedure and otherwise complying with the provisions of this revenue procedure.

.02 Filing procedure. A taxpayer changing a method of accounting pursuant to this revenue procedure must complete and file a current Form 3115 in duplicate. The original must be attached to the taxpayer's timely filed (including extensions) original federal income tax return for the year of change. For taxable years beginning in 1994, however, a taxpayer can attach the Form 3115 to an amended return filed on or before October 15, 1995. In all cases a copy of the Form 3115 must be filed with the National Office and addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Income Tax and Accounting) CC:DOM:IT&A, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044, no later than when the original of the Form 3115 is filed with the federal income tax return for the year of change. No user fee is required for a Form 3115 filed under this section 5.02, and a Form 3115 filed under this section 5.02 will not be acknowledged.

.03 Section 481(a) adjustment. The section 481(a) adjustment generally must be taken into account in computing taxable income in the manner provided in section 5.04 of this revenue procedure. A change in method of accounting under this revenue procedure is treated as a voluntary change in method of accounting that is initiated by the taxpayer, and, therefore, the section 481(a) adjustment is not restricted to post-1953 items.

.04 Section 481(a) adjustment period. Beginning with the year of change, a taxpayer changing its method of accounting for costs pursuant to this revenue procedure generally must take any applicable section 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. See sections 5.05 and 5.09 of this revenue procedure for exceptions to this general rule.

.05 De minimis rule. If the section 481(a) adjustment is less than $25,000, the taxpayer may elect to take the adjustment into account in the year of change instead of over the adjustment period otherwise prescribed by section 5.04 of this revenue procedure. A taxpayer that makes this election must attach to its original Form 3115 a statement indicating that it is electing the de minimis rule pursuant to section 5.05 of this revenue procedure.

.06 Application of section 1.263A-7T(e). Section 1.263A-7T(e) provides procedures that a taxpayer must use to revalue the items or costs included in its inventory for the first taxable year it is subject to section 263A. The following provisions of section 1.263A- 7T(e) apply to a change in method of accounting made pursuant to this revenue procedure for a taxpayer described in section 4.01(2), 4.01(3), or 4.01(4) of this revenue procedure:

(1) Section 1.263A-7T(e)(1), which provides the general rule that a taxpayer must revalue the items or costs included in its beginning inventory and also requires a taxpayer filing a consolidated federal income tax return to revalue deferred gains or losses resulting from deferred intercompany transactions;

(2) Section 1.263A-7T(e)(6), which provides procedures for a taxpayer to use in revaluing its inventory, including a facts and circumstances revaluation method, a weighted average revaluation method for a taxpayer using either the first-in, first-out (FIFO) or the specific goods LIFO inventory method, and a 3-year average revaluation method for a taxpayer using the dollar-value LIFO method (see section 5.07 of this revenue procedure for rules regarding the establishment of a new base year);

(3) Sections 1.263A-7T(e)(7), (8), and (9), which provide the procedures that a taxpayer using either the weighted average revaluation method or the 3-year average revaluation method may use to make adjustments to its inventory costs from prior years to prevent the capitalization of costs not incurred in earlier years; and

(4) Sections 1.263A-7T(e)(11)(iii) and (iv), which provide the definition of a change in method of accounting required to be made under section 263A, and the ordering rules when there are changes in methods of accounting other than those required by section 263A.

.07 New base year. The following rules apply only to a taxpayer using the dollar-value LIFO inventory method.

(1) Taxpayers described in sections 4.01(1) and 4.01(3) of this revenue procedure. A taxpayer described in section 4.01(1) (a small reseller changing from the UNICAP method to a non-UNICAP method) or section 4.01(3) (a reseller-producer changing from a UNICAP method to a simplified resale method) of this revenue procedure that is not currently using a simplified method for capitalizing the additional section 263A costs must restate its base year costs and LIFO carrying values by subtracting from each inventory layer the amount of additional section 263A costs in that layer. The taxpayer, however, may not change its base year.

(2) Taxpayers described in sections 4.01(2) and 4.01(4) of this revenue procedure.

(a) In general. A taxpayer described in section 4.01(2) (a formerly small reseller changing from a non-UNICAP method to the UNICAP method) or section 4.01(4) (a reseller-producer changing from a simplified resale method to a UNICAP method) of this revenue procedure changing to a non-simplified method for capitalizing additional section 263A costs must restate its base year costs and LIFO carrying values by adding to each inventory layer the amount of additional section 263A costs applicable to that layer, as provided in section 1.263A-7T(e)(6).

(b) Base years. A taxpayer described in section 5.07(2)(a) of this revenue procedure generally may not change its base year. However, if the taxpayer uses the 3-year average method under section 1.263A-7T(e)(6)(iv), the taxpayer must treat the year immediately preceding the year of change as its new base year.

.08 Applicability of Notice 88-23. Consistent with the principle of Notice 88-23, 1988-1 C.B. 490, a taxpayer changing its method of accounting under this revenue procedure, and also desiring to discontinue its use of the LIFO method of accounting for inventories in the same taxable year, may choose to change from the LIFO method before it makes the change in method of accounting pursuant to this revenue procedure.

.09 Applicability of Rev. Proc. 92-20. Except as otherwise provided in this revenue procedure, the following definitions and provisions of Rev. Proc. 92-20 apply to a change in method of accounting made pursuant to this revenue procedure:

(1) sections 3.01 through 3.04, which provide definitions for the following terms: "taxpayer," "year of change," and "filed";

(2) section 8.01(2), which modifies the adjustment period if 90 percent or more of the section 481(a) adjustment is attributable to the taxable year immediately preceding the year of change;

(3) section 8.01(4), which generally requires cooperatives to take the entire section 481(a) adjustment into account in the year of change;

(4) section 8.02, which provides that a short taxable year is treated as a separate taxable year; and

(5) section 8.03, which provides situations where the section 481(a) adjustment period that is computed under section 5.04 of this revenue procedure will be accelerated.

.10 Additional procedural requirements.

(1) Agreement to terms. In addition to providing all the information required on the Form 3115, a taxpayer must attach to the Form 3115 a written statement providing that it agrees to all the terms and conditions of this revenue procedure.

(2) Label. In order to assist in the processing of changes in method of accounting under this revenue procedure, reference to this revenue procedure must be made a part of the Form 3115 either by typing or legibly printing the following statement at the top of page 1 of each Form 3115: "FILED UNDER REV. PROC. 95-33."

(3) Signature. The Form 3115 and the statement described in section 5.10(1) of this revenue procedure must be signed by or on behalf of the taxpayer requesting the change by an individual with the authority to bind the taxpayer in such matters. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a partnership, a trustee on behalf of a trust, or an individual on behalf of a sole proprietorship. See the signature requirements in the General Instructions for Form 3115. If the taxpayer is a member of a consolidated group, a Form 3115 submitted on behalf of the taxpayer must also be signed by a duly authorized officer of the common parent. See section 1.1502-77.

(4) Authorized representative. If an agent is authorized to represent a taxpayer before the Service, to receive the original or a copy of correspondence concerning the request, or to perform any other act(s) regarding the Form 3115 on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to the Form 3115. A taxpayer's representative without a power of attorney to represent the taxpayer will not be given any information regarding the Form 3115.

.11 No protection from examination changes. A taxpayer that receives consent to change its method of accounting under this revenue procedure does not thereby obtain protection from examination changes for taxable years prior to the taxable year for which the change is made.

.12 Example. The following example illustrates the principles of this revenue procedure for small resellers and formerly small resellers.

Assume Corp X, a reseller of personal property incorporated January 2, 1989, adopted a taxable year ending December 31. Corp X determines that its average annual gross receipts for the three taxable years (or fewer, if applicable) immediately preceding taxable years 1989 through 1998 are as shown in the table below:

                         AVERAGE Annual Gross

                     Beginning        Ending

Corp X elected to use the simplified resale method under section 1.263A-1T(d)(3) for determining the amount of additional section 263A costs to be capitalized to each LIFO layer. Assume that Corp X was required to add $10,000 of additional section 263A costs to the cost of its 1993 ending inventory because of the $100,000 increment for 1993.

 Corp X's 1993 Ending Inventory:

 Corp X's 1994 Ending Inventory:

 Corp X's 1995 Ending Inventory:

 Corp X's 1996 Ending Inventory:

 Corp X's 1997 Ending Inventory:

 Corp X's 1998 Ending Inventory:

For changes in method of accounting to which this revenue procedure applies, this is the exclusive procedure available to a taxpayer for obtaining the Commissioner's consent to change its method of accounting. If a taxpayer to which this revenue procedure applies changes its method of accounting without complying with all the conditions of this revenue procedure, the taxpayer will be deemed to have initiated the change in method of accounting without obtaining the consent of the Commissioner as required by section 446(e).

SECTION 7. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Income Tax and Accounting) CC:DOM:IT&A, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SECTION 8. EFFECTIVE DATE

The provisions of this revenue procedure are effective for taxable years beginning on or after January 1, 1994. The Service will return any Form 3115, pending on June 21, 1995, or received thereafter, that is filed with the National Office pursuant to the Code, regulations, or administrative guidance other than this revenue procedure if the change in method of accounting is within the scope of this revenue procedure.

SECTION 9. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 94-49 is modified so that it does not apply to any taxpayer filing an application for a change in method of accounting within the scope of this revenue procedure.

DRAFTING INFORMATION

The principal author of this revenue procedure is Leo F. Nolan II of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Paul K. Gibbs (202) 622-5020 (not a toll-free call).