SECTION 2. BACKGROUND

.01 The trade or business of operating a restaurant or tavern requires the use of

many items in the preparation, service, and storage of food and beverages. Pots and pans, dishes, and glassware are common examples of these items, known as “smallwares” in the restaurant industry. Generally, an “opening package” of smallwares is purchased before a restaurant or tavern opens its doors to customers. Although an opening package is made up of hundreds or thousands of items, it is typically purchased as one unit from the same vendor. Replacement items are thereafter purchased on an ongoing basis. Industry data shows that the average cost of an opening package of smallwares ranges from $10,000 to $50,000, and that smallwares have an average useful life of slightly over one year.

.02 Section 162(a) of the Internal Revenue Code allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Under § 1.162–3 of the Income Tax Regulations, the cost of materials and supplies (other than incidental materials and supplies) may be deducted only to the extent that the materials and supplies are actually consumed and used in the taxpayer’s business during the taxable year.

.03 Section 263(a) provides that no deduction is allowed for the cost of new buildings or of permanent improvements or betterments made to increase the value of any property or estate. Section 1.263(a)–2(a) provides examples of capital expenditures, such as the cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year.

.04 Except as otherwise provided, under §§ 446(e) and 1.446–1(e), a taxpayer must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(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 a method of accounting. Section 481(a) generally requires those adjustments necessary to prevent amounts from being duplicated or omitted to be taken into account when a taxpayer’s taxable income is computed under a

2002–3 I.R.B. 374 January 22, 2002

amusement parks, theaters, casinos, country clubs, and similar social or recreational facilities.

.02 Smallwares . For purposes of this revenue procedure, smallwares consist of the following ten categories of items: (1) Glassware and paper or plastic cups; (2) Flatware (silverware) and plastic utensils; (3) Dinnerware (dishes) and paper or plastic plates; (4) Pots and Pans; (5) Table Top Items; (6) Bar Supplies; (7) Food Preparation Utensils and Tools; (8) Storage Supplies; (9) Service Items; and (10) Small Appliances that cost $500 or less. Categories 5 through 10 include, but are not limited to, the items listed below:

of the cost of smallwares to the smallwares method provided in section 5 of this revenue procedure is a change in method of accounting to which §§ 446 and 481 apply. A taxpayer that wants to change its method of accounting for the cost of smallwares to the smallwares method provided in section 5 of this revenue procedure must follow the automatic change in method of accounting provisions of Rev. Proc. 2002–9 (2002–3 I.R.B. 327) (or its successor) with the following modification: the scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply. However, if a taxpayer is under examination, before an area appeals office, or before a federal court with respect to any income tax issue at the time that a copy of the Form 3115, Appli- cation for Change in Accounting Method, is filed with the national office, the taxpayer must provide a copy of the Form 3115 to the examining agent, appeals officer, or counsel for the government, as appropriate, at the same time the copy of the Form 3115 is filed with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent, appeals officer, or counsel for the government, as appropriate.

.02 Audit Protection . If a taxpayer complies with the requirements of this revenue procedure and changes its method of accounting for the cost of smallwares to the smallwares method provided in section 5 of this revenue procedure, the treatment of those costs will not be raised as an issue in any taxable year before the year of change and, if the treatment of the cost of smallwares has already been raised as an issue in a taxable year before the year of change, that issue will not be further pursued.

.03 Section 481(a) Adjustment . A taxpayer changing its method of accounting under this revenue procedure for the cost of smallwares must take the entire net amount of any § 481(a) adjustment into account in computing taxable income for the year of change.