IRS PUBLISHES PROCEDURE FOR CHANGING ACCOUNTING METHOD TO COMPLY WITH UNICAP RULES.

Rev. Proc. 94-49

                               CONTENTS

.01 This revenue procedure provides the exclusive procedure for taxpayers to obtain expeditious consent to change certain methods of accounting for costs subject to section 263A of the Internal Revenue Code to methods required or permitted by sections 1.263A-1, 1.263A-2, and 1.263A-3 of the final section 263A Income Tax Regulations. A taxpayer complying with 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) for its first taxable year beginning on or after January 1, 1994.

.02 This revenue procedure also modifies the terms and conditions applicable under Rev. Proc. 92-20, 1992-1 C.B. 685, for applications for changes in methods of accounting for costs subject to section 263A filed during the taxpayer's first or second taxable year beginning on or after January 1, 1994. (This includes early applications filed for any taxable years that begin in 1996.)

SECTION 2. BACKGROUND

.01 Section 263A generally requires a taxpayer to capitalize direct costs and certain indirect costs properly allocable to (1) real property and tangible personal property produced by the taxpayer, and (2) real property and personal property acquired by the taxpayer for resale.

.02 Section 446(e) and section 1.446-1(e)(2)(i) state that, except as otherwise expressly provided, a taxpayer must obtain the consent of the Commissioner before changing a method of accounting for federal income tax purposes.

.03 Section 1.446-1(e)(2)(ii)(a) provides that a change in method of accounting includes a change in the overall plan of accounting for gross income or deductions or a change in the treatment of any material item used in the overall plan.

.04 Section 1.446-1(e)(3)(i) provides that in order to obtain the Commissioner's consent to a method change, 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.

.05 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 the Commissioner's consent to change its method of accounting in accordance with section 446(e).

.06 Section 481(a) provides that 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.

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

.08 Rev. Proc. 92-20 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 that revenue procedure 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.

SECTION 3. SCOPE

.01 Changes in method of accounting that may be made under this revenue procedure. Except as provided in section 3.02 below, this revenue procedure applies to any taxpayer changing its method of accounting for costs subject to section 263A, for the taxpayer's first taxable year beginning on or after January 1, 1994, to a method required or permitted by sections 1.263A-1, 1.263A-2, and 1.263A-3 of the final section 263A regulations. Except as provided in section 3.02 below, this revenue procedure applies to any change in method of accounting for costs subject to section 263A regardless of whether the taxpayer complied with the section 263A temporary regulations, which were published in the Federal Register on March 30, 1987, and August 7, 1987, or with any other administrative pronouncement regarding section 263A published prior to August 9, 1993.

.02 Changes in method of accounting that may not be made under this revenue procedure. This revenue procedure does not apply to a change in method of accounting --

(1) for purposes of determining "section 471 costs" under one of the simplified methods provided in the final section 263A regulations. "Section 471 costs" are generally those costs, other than interest, that were capitalized or would have been capitalized under a taxpayer's method of accounting immediately prior to the effective date of section 263A. See section 1.263A-1(d)(2) for the definition of "section 471 costs." Examples of simplified methods that require a determination of "section 471 costs" include the "simplified production method" as described in section 1.263A-2(b), and the "simplified resale method" as described in section 1.263A- 3(d);

(2) for electing the "historic absorption ratio" under the "simplified production method" or the "simplified resale method." See sections 1.263A-2(b)(4) and 1.263A-3(d)(4) for the procedures to make these elections;

(3) if the taxpayer is required to change its method of accounting to comply with section 263A for the first time in its first taxable year beginning on or after January 1, 1994. See section 1.263A-1T(e) for the procedures that a taxpayer must use to revalue items or costs included in its inventory for the first taxable year it is subject to section 263A;

(4) if the taxpayer is changing its method of accounting because it qualifies as a "small reseller" or it is changing its method because it no longer qualifies as a "small reseller." A "small reseller" is a reseller of personal property whose average annual gross receipts for the three preceding taxable years do not exceed $10,000,000. See section 263A(b)(2)(B) and section 1.263A-3(b) for an explanation of the exception from section 263A for small resellers;

(5) if a request for a change in method of accounting for costs subject to section 263A was filed for a taxable year prior to a taxpayer's first taxable year beginning on or after January 1, 1994, and the taxpayer withdrew the request, failed to sign and return its Consent Agreement to the Internal Revenue Service, or failed to implement the change in method of accounting after receiving permission to change;

(6) if the taxpayer has a "section 263A issue pending" on June 28, 1994, (see section 4.11 of this revenue procedure for a definition of a "section 263A issue pending") and the pending section 263A issue is being considered:

(a) by the District Director during an examination;

(b) by an appeals office of the Service with respect to an examination of the taxpayer's federal income tax return(s) for any taxable year; or

(c) by any federal court.

(7) if the taxpayer is the subject of a pending criminal investigation or proceeding concerning (a) directly or indirectly, any issue relating to the taxpayer's federal tax liability for any taxable year, or (b) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability for any taxable year on June 28, 1994.

.03 Procedures available when a change in method of accounting may not be made under this revenue procedure.

(1) If this revenue procedure does not apply to a taxpayer's change in method of accounting for costs subject to section 263A, the taxpayer must change its method of accounting for costs subject to section 263A in its first taxable year beginning on or after January 1, 1994, in accordance with the requirements of section 1.446- 1(e)(3)(i) and Rev. Proc. 92-20, or any other applicable Code, regulations, or administrative provisions pertaining to the change. For such changes in methods of accounting, the requirement provided in section 1.446-1(e)(3)(i) that a taxpayer must file an application on Form 3115 within 180 days after the beginning of the taxable year of change is waived for the taxpayer's first taxable year beginning on or after January 1, 1994, until the last day of that taxable year.

(2) If a change in method of accounting for costs subject to section 263A is not permitted under this revenue procedure solely by reason of section 3.02(6) of this revenue procedure, the taxpayer must file a Form 3115 for any change in method of accounting that is consistent with section 3.01 of this revenue procedure in its first taxable year beginning on or after January 1, 1994, pursuant to Rev. Proc. 92-20, or any other applicable Code, regulations, or administrative provisions pertaining to the change, provided the change in method of accounting is not the pending section 263A issue. The Form 3115 may be filed regardless of any provision that may otherwise prevent a taxpayer from filing the Form 3115; e.g., the taxpayer is under examination and a "window period" is not open to the taxpayer at the time of filing (see, e.g., section 6.02 of Rev. Proc. 92-20), or permission is required by an appeals officer or counsel for the Government (see, sections 4.02 and 4.03 of Rev. Proc. 92-20). The taxpayer, however, must provide a copy of the Form 3115 to the examining agent, appeals officer, or the counsel for the Government at the same time a copy is filed with the National Office.

(3) Taxpayers that are filing a Form 3115 pursuant to the waiver of conditions provided under this section should either type or legibly print the following statement at the top of page 1 of each Form 3115: "FILED UNDER SECTION 3.03 OF REV. PROC. 94-49." No user fee will be charged to taxpayers not permitted to change under this revenue procedure solely by reason of sections 3.02(5) or 3.02(6) of this revenue procedure.

(a) Year of change when a change in method of accounting is not made under this revenue procedure. For all applications for changes in methods of accounting for costs subject to section 263A filed under Rev. Proc. 92-20, or any other applicable Code, regulations, or administrative provisions pertaining to the change, during the taxpayer's first or second taxable year beginning on or after January 1, 1994, including early applications filed for any taxable year that begins in 1996, the Service reserves the discretion to treat the applications as applications to change the taxpayer's method of accounting for its first taxable year beginning on or after January 1, 1994. Consistent with this required 1994 year of change, a taxpayer may be required to file amended returns for its 1994 and any subsequent taxable years as a condition for granting the change in method of accounting filed for the 1995 or 1996 taxable years.

(b) Section 481(a) adjustment period when a change in method of accounting is not made under this revenue procedure. Under section 481(a), an adjustment attributable to a change in a taxpayer's method of accounting for an item is taken into account in order to prevent items from being duplicated or omitted by reason of the change in method of accounting. This adjustment is referred to as the "section 481(a) adjustment." The section 481(a) adjustment period is the applicable period for taking into account the section 481(a) adjustment required for the change in method of accounting regardless of whether the adjustment is positive (an increase in income) or negative (a decrease in income). For all applications for changes in methods of accounting for costs subject to section 263A filed under Rev. Proc. 92-20, or any other applicable Code, regulations, or administrative provisions pertaining to the change, during the taxpayer's first or second taxable year beginning on or after January 1, 1994, including early applications filed for any taxable year that begins in 1996, the section 481(a) adjustment, whether positive or negative, must be taken into account in accordance with the section 481(a) adjustment period prescribed in section 4.03 of this revenue procedure (generally four taxable years).

SECTION 4. 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 provided in section 1.446-1(e)(3)(i) 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 to a method required or permitted by the final section 263A regulations. This consent is granted for the taxpayer's first taxable year (the year of change for changes made pursuant to the automatic procedures of this revenue procedure, as defined in section 4.05 of this revenue procedure) beginning on or after January 1, 1994, provided the taxpayer files a current Form 3115 in the manner described in section 6 of this revenue procedure and otherwise complies with the provisions of this revenue procedure.

.02 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 4.03 of this revenue procedure. A change in method of accounting under this revenue procedure shall be 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.

.03 Section 481(a) adjustment period. Beginning with the year of change, a taxpayer changing its method of accounting for costs subject to section 263A pursuant to this revenue procedure generally must take its section 481(a) adjustment into account ratably over four taxable years in computing its taxable income regardless of whether the adjustment is positive or negative. See sections 4.04 and 4.10 of this revenue procedure for exceptions to this general rule.

.04 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 in lieu of the adjustment period otherwise prescribed by section 4.03 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 4.04 of this revenue procedure.

.05 Year of change for changes made pursuant to the automatic procedures of this revenue procedure. The year of change for a change in method of accounting for costs subject to section 263A that is made pursuant to the automatic procedures of this revenue procedure is the taxpayer's first taxable year beginning on or after January 1, 1994.

.06 Non-inventory assets. Because sections 1.263A-1, 1.263A-2, and 1.263A-3 of the final section 263A regulations applies only to costs incurred in taxable years beginning after December 31, 1993, in the case of non-inventory property, no section 481(a) adjustment is necessary to comply with the final section 263A regulations (i.e., the changes are generally effected on a cut-off basis). To qualify for the protection provided in section 4.13 of this revenue procedure, however, any taxpayer that was not in compliance with section 263A, the section 263A temporary regulations, or any other administrative pronouncement regarding section 263A applicable to non-inventory property for taxable years beginning before January 1, 1994, must take into account any section 481(a) adjustment that results from a change from its prior erroneous method of accounting. Thus, such a taxpayer must revalue its non-inventory property as of its first taxable year beginning on or after January 1, 1994, and the section 481(a) adjustment will equal the difference between the adjusted basis of the property as originally valued and the adjusted basis of the property as revalued. In revaluing the non-inventory property, however, the only additional section 263A costs that must be taken into account are those additional section 263A costs incurred after December 31, 1986, in taxable years ending after that date. See section 1.263A-1(d)(3) for the definition of additional section 263A costs. Taxpayers filing a consolidated federal income tax return that desire the protection provided in section 4.13 of this revenue procedure must also revalue deferred gains or losses arising from deferred intercompany transactions in a manner consistent with the principles applicable to inventory property under sections 1.263A-1T(e)(1)(ii), (iii), and (iv).

.07 Applicability of section 1.263A-1T(e). Section 1.263A-1T(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- 1T(e) apply to a change in method of accounting required or permitted by the final section 263A regulations that is made pursuant to this revenue procedure:

(1) Section 1.263A-1T(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-1T(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 last-in, first-out (LIFO) inventory method, and a 3-year average revaluation method for a taxpayer using the dollar- value LIFO method. See section 4.08 of this revenue procedure for rules regarding the establishment of a new base year;

(3) Sections 1.263A-1T(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) Section 1.263A-1T(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.

.08 New Base Year. A taxpayer that revalues its LIFO layers is generally not permitted to establish a new base year if it changes its method of accounting pursuant to this revenue procedure. However, a dollar-value LIFO taxpayer, using the 3-year average revaluation method and not using the simplified production method or the simplified resale method, must establish a new base year if it changes its method of accounting pursuant to this revenue procedure.

.09 Applicability of Notice 88-23. Notice 88-23, 1988-1 C.B. 490, is applicable to a change in method of accounting that is made pursuant to this revenue procedure. Notice 88-23 provides that a taxpayer changing its method of accounting to comply with section 263A for its first taxable year beginning after December 31, 1986, 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 that is required by section 263A.

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

(1) sections 3.01 through 3.04, which provide definitions for the following terms: "taxpayer," "under examination," "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 4.03 of this revenue procedure will be accelerated.

.11 Section 263A issue pending. For purposes of this revenue procedure, a section 263A issue is pending if the Service has sent the taxpayer written notification indicating an adjustment is being made or will be proposed with respect to costs subject to section 263A. This will generally occur after the Service has gathered information sufficient to determine that a proposed adjustment is appropriate and justified, although the exact amount of the adjustment may not yet be determined.

.12 Taxpayers under examination with respect to which a section 263A issue is not pending.

(1) A taxpayer that is under examination, but does not have an issue pending on June 28, 1994, regarding costs subject to section 263A, must change its method of accounting under this revenue procedure and must provide the examining agent with a copy of its Form 3115 indicating the specific methods of accounting that it is changing under this revenue procedure. The Form 3115 generally must be provided to the examining agent on or before 180 days after June 28, 1994 (December 27, 1994), or for a taxpayer that is not under examination on June 28, 1994, 180 days after the taxpayer first comes under examination. Notwithstanding the above, however, the Form 3115 must be provided to the examining agent no later than the date the taxpayer must file its original federal income tax return (including extensions) for its first taxable year beginning on or after January 1, 1994. Upon receipt of the Form 3115, the Service will not propose or make any adjustment with respect to the methods of accounting for costs that the taxpayer is changing under this revenue procedure, unless the taxpayer fails to effect the change in method of accounting in the manner described in this revenue procedure or otherwise fails to comply with the provisions of this revenue procedure.

(2) The 180 day requirements of this section will be waived if the taxpayer obtains a written agreement from the examining agent that the examining agent will not propose or make any adjustments with respect to the taxpayer's section 263A costs from June 28, 1994, to the date the taxpayer affects the change in method of accounting under this revenue procedure. If this agreement is obtained, the taxpayer must provide the examining agent with a copy of the Form 3115 at the same time a copy is filed with the National Office under section 6.01 of this revenue procedure. It is anticipated that the examining agent will enter into such an agreement when the examining agent does not anticipate that section 263A costs will be examined, or any section 263A issues will be raised.

.13 Protection for taxable years prior to the year of change. The district director may not propose that a taxpayer change the same method of accounting for a year prior to the year of change required by this revenue procedure if (1) a taxpayer's change in method of accounting is within the scope of this revenue procedure, (2) the taxpayer timely files a completed Form 3115 to change its method of accounting for costs subject to section 263A in the manner described in this revenue procedure, and (3) the taxpayer otherwise complies with the provisions of this revenue procedure. The district director, however, will verify the amount of the section 481(a) adjustment, the section 481(a) adjustment period, and otherwise determine whether the taxpayer has fully complied with the provisions of this revenue procedure.

.14 Exclusive procedure. For changes in method of accounting permitted by this revenue procedure, this is the exclusive procedure available to a taxpayer for obtaining the Commissioner's consent to change its method of accounting for costs subject to section 263A to a method required or permitted by sections 1.263A-1, 1.263A-2, and 1.263A-3 of the final section 263A regulations.

SECTION 5. FAILURE TO COMPLY WITH CONDITIONS

If a taxpayer to which this revenue procedure applies changes its method of accounting for costs subject to section 263A without complying with all the conditions of this revenue procedure, it 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 6. MANNER OF EFFECTING THE METHOD CHANGE

.01 General procedure. A taxpayer that changes its method of accounting under this revenue procedure must complete and file a current Form 3115 in duplicate. The original Form 3115 must be attached to the taxpayer's timely filed (including extensions) original federal income tax return for the year of change. 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 Form 3115 is filed with the federal income tax return. No user fee is required for a Form 3115 filed under section 6.01 of this revenue procedure. A Form 3115 filed pursuant to this revenue procedure will not be acknowledged.

.02 Special procedure for taxpayers under examination. A taxpayer that is under examination but does not have a section 263A issue pending as described in section 4.11 of this revenue procedure must satisfy the procedural requirements of this revenue procedure by providing a copy of the Form 3115 to the examining agent as set forth in section 4.12 of this revenue procedure, in addition to meeting the requirements of section 6.01 of this revenue procedure.

.03 Additional procedural requirements.

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

(2) Ineligible method changes. If it is determined that a change in method of accounting may not be made under this revenue procedure, the National Office or the district director will so advise the taxpayer. See section 3.03 of this revenue procedure.

(3) 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 each Form 3115 either by typing or legibly printing the following statement at the top of page 1 of each Form 3115: (a) "AUTOMATIC CHANGE WITH POSITIVE SECTION 481(a) ADJUSTMENT UNDER REV. PROC. 94-49" if the taxpayer has a positive section 481(a) adjustment; or (b) "AUTOMATIC CHANGE WITH NEGATIVE SECTION 481(a) ADJUSTMENT UNDER REV. PROC. 94-49" if the taxpayer has a negative section 481(a) adjustment.

(4) Signature. The Form 3115 and the statement described in section 6.03(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.

(5) 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) should 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.

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 set forth in this revenue procedure are generally effective for a taxpayer's first taxable year beginning on or after January 1, 1994. The Service will return any Form 3115 that is filed with the National Office pursuant to the Code, regulations, or any administrative guidance other than this revenue procedure if the change in method of accounting is within the scope of this revenue procedure. See sections 3.01 and 4.14 of this revenue procedure.

DRAFTING INFORMATION

The principal author of this revenue procedure is Rosemary DeLeone of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. DeLeone on (202) 622-4970 (not a toll-free call).