SECTION 4. UNIFORM — Internal Revenue Bulletin 1999-52

CAPITALIZATION (§ 263A)

(a) Applicability. This change applies to a taxpayer that wants to change its method of accounting for package design costs that are within the scope of Rev. Proc. 97–35, 1997–2 C.B. 448, to one of the three alternative methods of accounting for package design costs described in section 5 of Rev. Proc. 97–35. The three alternative methods of accounting for package design costs described are: (1) the capitalization method, (2) the designby-design capitalization and 60-month amortization method, and (3) the pool-ofcost capitalization and 48-month amortization method.

(b) Inapplicability. This change does not apply to a taxpayer that wants to change to the capitalization method for costs of developing (or modifying) any package design that has an ascertainable useful life.

(2) Additional requirements. If a taxpayer is changing its method of ac

(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 activi

.01 Certain uniform capitalization (UNICAP) methods used by small re- sellers, formerly small resellers, and re- seller-producers.

(1) Description of change and scope.

ties to a permissible simplified resale method described 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); or

(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). (b) Scope limitations inapplicable. A taxpayer that wants to make this change is not subject to the scope limitations in section 4.02 of this revenue procedure. However, if the taxpayer is under examination, before an appeals office, or before a federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals officer, or counsel for the government, as appropriate, at the same time that it files the copy of the application with the national office. The application must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.

(c) Inapplicability. This change does not apply to a taxpayer making a historic absorption ratio election under § 1.263A–2(b)(4) or 1.263A–3(d)(4). (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 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).

(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

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method” means a method of capitalizing costs that is permissible under § 263A.

(g) “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 section 4.01 of this APPENDIX generally must take any applicable § 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 section 5.04(3) of this revenue procedure for exceptions to this general rule.

(4) No audit protection . A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.

(5) Example . The following example illustrates the principles of section 4.01 of this APPENDIX for small resellers and formerly small resellers.

Assume X, a corporate reseller of personal property, incorporated January 2, 1991, adopted a taxable year ending December 31. X determines that its average annual gross receipts for the three taxable years (or fewer, if applicable) immediately preceding taxable years 1991 through 2000 are as shown in the table below:

was required to include $20,000 of the unamortized 1995 positive § 481(a) adjustment in 1996 taxable income. Assume that X was required to add $10,000 of additional § 263A costs to the cost of its 1996 ending inventory because of the $100,000 increment for 1996.

X’s 1996 Ending Inventory:

Beginning Inventory (With UNICAP costs) . . . . . . . . . . . . . . . . . .$1,190,000 1996 Increment . . . . . . . . . . . .100,000

Additional § 263A Costs in 1996 Increment . . . . . . . . . . . . . . . . 10,000 Total 1996 Ending Inventory . . . . . . . . . . . . . . .$1,300,000

X’s Unamortized 1995 § 481(a) Adjustment:

Unamortized 1995 § 481(a) Adjustment—12/31/95 . . . . . $60,000

Amount Included in 1996 Taxable Income . . . . . . . . . . . . . . . . . .<20,000>

Unamortized 1995 § 481(a) Adjustment—12/31/96 . . . . . . .$40,000

Because X satisfies the small reseller exception for 1997, X may change voluntarily from the UNICAP method to a permissible non-UNICAP inventory capitalization method under section 4.01 of this APPENDIX. To reflect the removal of the additional § 263A costs from the cost of its 1997 beginning inventory, X must compute a corresponding § 481(a) adjustment, which is a negative $100,000 ($1,200,000 - $1,300,000). Because X used the UNICAP method for only two years (that is, 1995 and 1996), X must include one-half of the § 481(a) adjustment when computing taxable income for each of the two taxable years beginning with 1997. Thus, X must include a $50,000 negative § 481(a) adjustment in 1997 taxable income. In addition, X must include $20,000 of the unamortized 1995 § 481(a) adjustment in 1997 taxable income.

X’s 1997 Ending Inventory:

Beginning Inventory (With UNICAP costs) . . . . . . . . . . . . . . . . . .$1,300,000 1997 Increment . . . . . . . . . . . .100,000 1997 § 481(a) Adjustment . . . . . . . . . . . . .<100,000> Total 1997 Ending Inventory . . . . . . . . . . . . . . .$1,300,000

AVERAGE Annual Gross

Current Receipts for the Three Taxable Years

Taxable Years Immediately Preceding the

Current Taxable Year Year 1991 $ 0 1992 5,000,000 1993 6,000,000 1994 7,000,000 1995 11,000,000 1996 11,000,000 1997 9,000,000 1998 8,000,000 1999 11,000,000 2000 12,000,000

Furthermore, X, which adopted the dollar-value LIFO inventory method, has the following LIFO inventory balances determined without considering the effects of the UNICAP method:

Beginning Ending 1995 $1,000,000 $1,100,000 1996 1,100,000 1,200,000 1997 1,200,000 1,300,000 1998 1,300,000 1,400,000 1999 1,400,000 1,500,000 2000 1,500,000 1,600,000

X was required by § 263A to change to the UNICAP method for 1995 because its average annual gross receipts for the three taxable years immediately preceding 1995 were $11,000,000, which exceeded the $10,000,000 ceiling permitted by the small reseller exception. Assume that X was required to capitalize $80,000 of “additional § 263A costs” to the cost of its 1995 beginning inventory because of this change in inventory method. In addition, X was required to include one-fourth of the § 481(a) adjustment when computing taxable income for each of the four taxable years beginning with 1995. Thus, X was required to include a $20,000 positive § 481(a) adjustment in its 1995 taxable income.

X elected to use the simplified resale method without a historic absorption ratio election under § 1.263A–3(d)(3) for determining the amount of additional § 263A costs to be capitalized to each LIFO layer. Assume that X was required to add $10,000 of additional § 263A costs to the cost of its 1995 ending inventory because of the $100,000 increment for 1995.

X’s 1995 Ending Inventory:

Beginning Inventory (Without UNICAP costs) . . . . . . . . . . . . . . . . . .$1,000,000 1995 Increment . . . . . . . . . . . .100,000 Additional § 263A Costs in Beginning Inventory . . . . . . . . . . . . . . . . . .80,000 Additional § 263A Costs in 1995 Increment . . . . . . . . . . . . . . . . . .10,000 Total 1995 Ending Inventory . . . . . . . . . . . . . . .$1,190,000

X’s Unamortized 1995 § 481(a) adjustment:

1995 § 481(a) Adjustment . . . .$80,000 Amount Included in 1995 Taxable Income . . . . . . . . . . .<20,000> Unamortized 1995 § 481(a) Adjustment—12/31/95 . . . . . . .$60,000

Because X failed to satisfy the small reseller exception for 1996, X was required to continue using the UNICAP method for its inventory costs. Furthermore, X

1999–52 I.R.B. 745 December 27, 1999

X’s Unamortized 1995 § 481(a) Adjustment:

Unamortized 1995 § 481(a) Adjustment—12/31/96 . . . . . $40,000 Amount Included in 1997 Taxable Income . . . . . . . . . . . . . . . . . .<20,000> Unamortized 1995 § 481(a) Adjustment—12/31/97 . . . . . . .$20,000

X’s Unamortized 1997 § 481(a) Adjustment:

1997 § 481(a) Adjustment . . . . . . . . . . . .$<100,000> Amount Included in 1997 Taxable Income . . . . . . . . . . . . . . . . . . . .50,000 Unamortized 1997 § 481(a) Adjustment—12/31/97 . . . .$< 50,000>

X also satisfies the small reseller exception for 1998 and, therefore, is not required to return to the UNICAP method for 1998. X, however, must include $20,000 of the unamortized 1995 positive § 481(a) adjustment and $50,000 of the unamortized 1997 negative § 481(a) adjustment in 1998 taxable income.

X’s 1998 Ending Inventory:

Beginning Inventory (Without UNICAP costs) . . . . . . . . . . . . . . . . . .$1,300,000 1998 Increment . . . . . . . . . . . .100,000 Total 1998 Ending Inventory . . . . . . . . . . . . . . .$1,400,000

X’s Unamortized 1995 § 481(a) Adjustment:

Unamortized 1995 § 481(a) Adjustment—12/31/97 . . . . . $20,000 Amount Included in 1998 Taxable Income . . . . . . . . . . . . . . . . . .<20,000> Unamortized 1995 § 481(a) Adjustment—12/31/98 . . . . . . . . .$ 0

X’s Unamortized 1997 § 481(a) Adjustment:

Unamortized 1997 § 481(a) Adjustment—12/31/97 . . . . $<50,000> Amount Included in 1998 Taxable Income . . . . . . . . . . . . . . . . . . . .50,000 Unamortized 1997 § 481(a) Adjustment—12/31/98 . . . . . . . .$ 0

In 1999, X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method as provided under section 4.01 of this APPENDIX. X changes to the simplified resale method without a historic absorption ratio election under § 1.263A–3(d)(3). Assume

that X must capitalize $120,000 of additional § 263A costs to the cost of its 1999 beginning inventory because of this change in inventory method. In addition, X must determine the appropriate adjustment period for the corresponding positive § 481(a) adjustment. Because X used its former inventory method for two taxable years before 1999 (that is, 1997 and 1998), X must include one-half of the § 481(a) adjustment when computing taxable income for each of the two taxable years beginning with 1999. Thus, X must include a $60,000 positive § 481(a) adjustment in its 1999 taxable income. Assume that X must add $10,000 of additional § 263A costs to the cost of its 1999 ending inventory because of the $100,000 increment for 1999.

X’s 1999 Ending Inventory:

Beginning Inventory (Without UNICAP costs) . . . . . . . . . . . . . . . . . .$1,400,000 1999 Increment . . . . . . . . . . . .100,000 Additional § 263A costs in Beginning Inventory . . . . . . . 120,000 Additional § 263A costs in 1999 Increment . . . . . . . . . . . . . . . . . .10,000 Total 1999 Ending Inventory . . . . . . . . . . . . . . .$1,630,000

X’s Unamortized 1999 § 481(a) adjustment:

1999 § 481(a) Adjustment . . $120,000 Amount Included in 1999 Taxable Income . . . . . . . . . . . . . . . . .< 60,000> Unamortized 1999 § 481(a) Adjustment—12/31/99 . . . . . .$ 60,000

Because X fails to satisfy the small reseller exception for 2000, X must continue using the UNICAP method for its inventory costs. Furthermore, X is required to include $60,000 of the unamortized 1999 positive § 481(a) adjustment in 2000 taxable income. Assume that X is required to add $10,000 of additional § 263A costs to the cost of its 2000 ending inventory because of the $100,000 increment for 2000.

X’s 2000 Ending Inventory:

Beginning Inventory (With UNICAP costs) . . . . . . . . . . . . . . . . . .$1,630,000 2000 Incremen . . . . . . . . . . . . .100,000 Additional § 263A Costs in 2000 Increment . . . . . . . . . . . . . . . . . .10,000 Total 2000 Ending Inventory . . . . . . . . . . . . . . .$1,740,000

X’s Unamortized 1999 § 481(a) Adjustment:

Unamortized 1999 § 481(a) Adjustment—12/31/99 . . . . . $60,000 Amount Included in 2000 Taxable Income . . . . . . . . . . . . . . . . . .<60,000> Unamortized 1999 § 481(a) Adjustment—12/31/00 . . . . . . . . .$ 0

.02 Reserved.

SECTION 4A. DEFERRED COMPENSATION (§ 404)

.01 Change to comply with § 404(a)(11). (1) Description of change and scope.

(a) Applicability. This change applies to a taxpayer that must change its method of accounting for its first taxable year ending after July 22, 1998, to comply with § 404(a)(11). Section 404(a)(11) provides that, for purposes of determining under § 404 whether compensation of an employee is deferred compensation and when deferred compensation is paid, no amount is treated as received by the employee, or paid, until it is actually received by the employee. Section 404(a)(11) overturns the decision in Schmidt Baking Co. v. Commissioner, 107 T.C. 271 (1996), in which the court held that a § 83(a) income inclusion event upon securitization of vacation and severance pay benefits with a letter of credit constitutes receipt of those benefits by employees for purposes of determining whether an employer’s deduction for the benefits is subject to § 404. See Notice 99–16, 1999–13 I.R.B. 10 (March 29, 1999).

(b) Scope limitations inapplica- ble. A taxpayer that must make this change is not subject to the scope limitations in section 4.02 of this revenue procedure. However, if the taxpayer is under examination, before an appeals office, or before a federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals officer, or counsel for the government, as appropriate, at the same time that it files the copy of the application with the national office. The application must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.

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(2) Section 481(a) adjustment pe- riod. A taxpayer must take the § 481(a) adjustment into account ratably over three taxable years.

(3) No audit protection. A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.

.02 Reserved.