SECTION 2. DEPRECIATION OR AMORTIZATION (§ 56(a)(1), 56(g)(4)(A), 167, 168, OR 197, OR

FORMER § 168)................................................................................................................................................................................. 349

.01 Impermissible to permissible method of accounting for depreciation or amortization......................................................... 349

(1) Description of change ........................................................................................................................................................ 349 (2) Scope ................................................................................................................................................................................... 349 (3) Additional requirements ...................................................................................................................................................... 350 (4) Section 481(a) adjustment .................................................................................................................................................. 350 (5) Basis adjustment ................................................................................................................................................................. 351 (6) Meaning of depreciation allowable ................................................................................................................................... 351 .02 Permissible to permissible method of accounting for depreciation ....................................................................................... 351

(1) Description of change ........................................................................................................................................................ 351 (2) Scope ................................................................................................................................................................................... 351 (3) Changes covered ................................................................................................................................................................. 352 (4) Additional requirements ...................................................................................................................................................... 352 (5) Section 481(a) adjustment .................................................................................................................................................. 353 .03 Sale or lease transactions ........................................................................................................................................................ 353

(1) Description of change and scope ....................................................................................................................................... 353 (2) Manner of making the change ........................................................................................................................................... 353 (3) No audit protection ............................................................................................................................................................. 353 .04 Modern golf course greens ..................................................................................................................................................... 353

(1) Description of change and scope ....................................................................................................................................... 353 (2) Additional requirements ...................................................................................................................................................... 353

SECTION 2A. RESEARCH AND EXPERIMENTAL EXPENDITURES (§ 174) ......................................................................... 353

.01 Changes to a different method or different amortization period............................................................................................ 353

(1) Description of change ........................................................................................................................................................ 353 (2) Scope ................................................................................................................................................................................... 354 (3) Manner of making the change ........................................................................................................................................... 354 (4) Additional requirement ....................................................................................................................................................... 354 (5) No audit protection ............................................................................................................................................................. 354 .02 Reserved ................................................................................................................................................................................... 354

SECTION 2B. COMPUTER SOFTWARE EXPENDITURES (§§ 162, 167, AND 197)............................................................... 354

.01 Description of change .............................................................................................................................................................. 354 .02 Scope ........................................................................................................................................................................................ 354 .03 Inapplicability........................................................................................................................................................................... 354 .04 Statement required.................................................................................................................................................................... 354

SECTION 3. CAPITAL EXPENDITURES (§ 263).......................................................................................................................... 354

.01 Package design costs................................................................................................................................................................ 354

(1) Description of change and scope ....................................................................................................................................... 354 (2) Additional requirements ...................................................................................................................................................... 355 .02 Line pack gas; cushion gas...................................................................................................................................................... 355

(1) Description of change and scope ....................................................................................................................................... 355 (2) Additional requirements ...................................................................................................................................................... 355 .03 Removal costs .......................................................................................................................................................................... 355

(1) Description of change ........................................................................................................................................................ 355 (2) Additional requirements ...................................................................................................................................................... 355 (3) Scope limitations inapplicable ........................................................................................................................................... 355

SECTION 4. UNIFORM CAPITALIZATION (§ 263A) .................................................................................................................. 355

.01 Certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers.............................................. 355

(1) Description of change and scope ....................................................................................................................................... 355

2002–3 I.R.B. 330 January 22, 2002

(2) Definitions ........................................................................................................................................................................... 355 (3) Section 481(a) adjustment .................................................................................................................................................. 356 (4) Multiple changes ................................................................................................................................................................. 356 (5) Example ............................................................................................................................................................................... 356 .02 Certain uniform capitalization (UNICAP) methods used by producers................................................................................. 359

(1) Applicability ........................................................................................................................................................................ 359 (2) Inapplicability ..................................................................................................................................................................... 359 (3) Definition ............................................................................................................................................................................ 359 (4) Multiple changes ................................................................................................................................................................. 359 .03 Certain uniform capitalization (UNICAP) methods used by taxpayers

in a farming business. ............................................................................................................................................................. 359 (1) Description of change and scope ....................................................................................................................................... 359 (2) Year of change .................................................................................................................................................................... 359 (3) Scope limitations inapplicable ........................................................................................................................................... 359 (4) Manner of making change; audit protection ..................................................................................................................... 359 (5) Multiple changes ................................................................................................................................................................. 360 .04 Change to no longer capitalize research and experimental expenditures

under uniform capitalization (UNICAP) ................................................................................................................................ 360 (1) Description of change and scope ....................................................................................................................................... 360 (2) Manner of making the change ........................................................................................................................................... 360 (3) No audit protection ............................................................................................................................................................. 360

SECTION 4A. LOSSES, EXPENSES AND INTEREST WITH RESPECT TO TRANSACTIONS BETWEEN RELATED TAXPAYERS (§ 267)....................................................................................................................................................... 360

.01 Change to comply with § 267 ................................................................................................................................................. 360 .02 Reserved ................................................................................................................................................................................... 360

SECTION 4B. DEFERRED COMPENSATION (§ 404).................................................................................................................. 360

.01 Change to comply with § 404(a)(11) ...................................................................................................................................... 360

(1) Description of change and scope ....................................................................................................................................... 360 (2) Section 481(a) adjustment period ...................................................................................................................................... 360 (3) No audit protection ............................................................................................................................................................. 360 .02 Deferred compensation ........................................................................................................................................................... 360

(1) Applicability ........................................................................................................................................................................ 360 (2) Inapplicability ..................................................................................................................................................................... 361

SECTION 5. METHODS OF ACCOUNTING (§ 446) .................................................................................................................... 361

.01 Cash or hybrid method to accrual method.............................................................................................................................. 361

(1) Description of change and scope ....................................................................................................................................... 361 (2) Section 481(a) adjustment .................................................................................................................................................. 361 (3) Change to a special method of accounting ....................................................................................................................... 362 (4) Coordination with section 13.01 of the APPENDIX for short-term obligations ............................................................. 362 .02 Multi-year service warranty contracts ..................................................................................................................................... 362

(1) Description of change and scope ....................................................................................................................................... 362 (2) Manner of making the change ........................................................................................................................................... 362 .03 Multi-year insurance policies for multi-year service warranty contracts - Description of change and scope ................. 362

(1) Applicability ........................................................................................................................................................................ 362 (2) Inapplicability ..................................................................................................................................................................... 362 (3) Description of method ....................................................................................................................................................... 362 .04 Interest accruals on short-term consumer loans - Rule of 78s method ............................................................................. 362

(1) Description of change and scope ....................................................................................................................................... 362 (2) Background ......................................................................................................................................................................... 362 (3) Manner of making the change ........................................................................................................................................... 363 .05 Small taxpayers changing to overall cash method ..................................................................................................................363

(1) Description of change ........................................................................................................................................................ 363 (2) Scope limitations inapplicable ........................................................................................................................................... 363 (3) Manner of making the change ........................................................................................................................................... 363

January 22, 2002 331 2002–3 I.R.B.

(4) Automatic changes to treating inventoriable items as nonincidental materials and supplies under

Rev. Proc. 2001–10 ............................................................................................................................................................. 363 .06 Nonaccrual-experience method................................................................................................................................................ 363

(1) Applicability ........................................................................................................................................................................ 363 (2) Inapplicability ..................................................................................................................................................................... 363 (3) Scope limitations inapplicable ........................................................................................................................................... 363

SECTION 5A. TAXABLE YEAR OF INCLUSION (§ 451)........................................................................................................... 363

.01 Accrual of interest on nonperforming loans............................................................................................................................ 363

(1) Description of change and scope ....................................................................................................................................... 363 (2) Section 481(a) adjustment .................................................................................................................................................. 363 .02 Cash advances on insurance commissions.............................................................................................................................. 363

(1) Description of change ........................................................................................................................................................ 363 (2) Year of change .................................................................................................................................................................... 363 (3) Scope limitations inapplicable ........................................................................................................................................... 363 (4) Manner of making the change ........................................................................................................................................... 363 .03 Advance rentals - description of change and scope............................................................................................................. 364

SECTION 6. OBLIGATIONS ISSUED AT DISCOUNT (§ 454) .................................................................................................... 364

.01 Series E, EE or I U.S. savings bonds ..................................................................................................................................... 364

(1) Description of change and scope ....................................................................................................................................... 364 (2) Manner of making the change ........................................................................................................................................... 364 .02 Reserved ................................................................................................................................................................................... 364

SECTION 7. PREPAID SUBSCRIPTION INCOME (§ 455) .......................................................................................................... 364

.01 Prepaid subscription income.................................................................................................................................................... 364

(1) Description of change and scope ....................................................................................................................................... 364 (2) Manner of making the change ........................................................................................................................................... 364 .02 Reserved ................................................................................................................................................................................... 364

SECTION 7A. SPECIAL RULES FOR LONG-TERM CONTRACTS (§ 460) ............................................................................. 364

.01 Change to comply with final regulations under § 460........................................................................................................... 364

(1) Description of change and scope ....................................................................................................................................... 364 (2) Year of change .................................................................................................................................................................... 364 (3) Manner of making change ................................................................................................................................................. 364 (4) Scope limitations inapplicable ........................................................................................................................................... 364 (5) No audit protection ............................................................................................................................................................. 364 .02 Change from exempt-contract method to percentage-of-completion method ....................................................................... 364

(1) Description of change and scope ....................................................................................................................................... 364 (2) Manner of making change ................................................................................................................................................. 365 (3) No audit protection ............................................................................................................................................................. 365

SECTION 8. TAXABLE YEAR OF DEDUCTION (§ 461)............................................................................................................ 365

.01 Timing of incurring liabilities for employee compensation .................................................................................................. 365

(1) Self-insured employee medical benefits ............................................................................................................................. 365 (2) Amounts taken into account ............................................................................................................................................... 365 .02 Timing of incurring liabilities for real property taxes, personal property taxes and state income taxes ............................. 365

(1) Description of change ........................................................................................................................................................ 365 (2) Scope ................................................................................................................................................................................... 365 (3) Amounts taken into account ............................................................................................................................................... 365 .03 Timing of incurring liabilities under a workers’ compensation act, tort, breach of contract, or violation of law .............. 365

(1) Description of change and scope ....................................................................................................................................... 365 (2) Amounts taken into account ............................................................................................................................................... 365 .04 Timing of incurring liabilities for payroll taxes...................................................................................................................... 365

(1) Applicability ........................................................................................................................................................................ 366 (2) Inapplicability ..................................................................................................................................................................... 366 (3) Recurring item exception ................................................................................................................................................... 366 (4) Amounts taken into account ............................................................................................................................................... 366

2002–3 I.R.B. 332 January 22, 2002

.05 Cooperative advertising............................................................................................................................................................ 366

(1) Description of change and scope ....................................................................................................................................... 366 (2) Scope limitations inapplicable ........................................................................................................................................... 366 .06 Distributor commissions .......................................................................................................................................................... 366

(1) Changes made under Rev. Proc. 2000–38. ........................................................................................................................ 366 (2) Changes not made under Rev. Proc. 2000–38 .................................................................................................................. 367

SECTION 9. INVENTORIES (§ 471) ............................................................................................................................................... 367

.01 Cash discounts.......................................................................................................................................................................... 367

(1) Description of change and scope ....................................................................................................................................... 367 (2) Computation of § 481 adjustment for changes to net invoice method ............................................................................. 367 (3) Computation of § 481 adjustment for changes to gross invoice method ......................................................................... 367 .02 Estimating inventory ................................................................................................................................................................ 367

(1) Description of change and scope ....................................................................................................................................... 367 (2) Scope limitations inapplicable ........................................................................................................................................... 368 (3) Additional requirements ...................................................................................................................................................... 368 (4) Audit protection .................................................................................................................................................................. 368 (5) Future change ..................................................................................................................................................................... 368 .03 Small taxpayer exception from requirement to account for inventories under § 471........................................................... 368

(1) Description of change ........................................................................................................................................................ 368 (2) Scope limitations inapplicable ........................................................................................................................................... 368 (3) Manner of making the change ........................................................................................................................................... 368 (4) Automatic changes to the cash method under Rev. Proc. 2001–10 ................................................................................. 368 .04 “Floor stocks” payments made or received ............................................................................................................................ 368

(1) Description of change and scope ....................................................................................................................................... 368 (2) Requirements ....................................................................................................................................................................... 368 (3) Scope limitations inapplicable ........................................................................................................................................... 368 (4) Manner of making the change ........................................................................................................................................... 368 .05 Qualifying volume-related trade discounts.............................................................................................................................. 368

(1) Description of change and scope ....................................................................................................................................... 368 (2) Section 481 adjustment ....................................................................................................................................................... 368 .06 Impermissible methods of valuation........................................................................................................................................ 368

SECTION 10. LAST-IN, FIRST-OUT (LIFO) INVENTORIES (§ 472) ......................................................................................... 368

.01 Change from the LIFO inventory method .............................................................................................................................. 368

(1) Description of change and scope ....................................................................................................................................... 368 (2) Limitation on LIFO election .............................................................................................................................................. 369 (3) Effect of subchapter S election by corporation ................................................................................................................. 369 (4) Additional requirements ...................................................................................................................................................... 369 .02 Determining current-year cost under the LIFO inventory method......................................................................................... 369

(1) Description of change and scope ....................................................................................................................................... 369 (2) Manner of making the change ........................................................................................................................................... 370 .03 Alternative LIFO inventory method for retail automobile dealers......................................................................................... 370

(1) Description of change and scope ....................................................................................................................................... 370 (2) Manner of making the change ........................................................................................................................................... 370 .04 Used vehicle alternative LIFO method ................................................................................................................................... 370

(1) Description of change and scope ....................................................................................................................................... 370 (2) Additional requirements ...................................................................................................................................................... 370 (3) Scope limitations inapplicable ........................................................................................................................................... 370 (4) Manner of making change ................................................................................................................................................. 370 (5) Concurrent change available for certain IPIC taxpayers ................................................................................................. 370 .05 Determining the cost of used vehicles purchased or taken as a trade-in............................................................................... 370

(1) Description of change and scope ....................................................................................................................................... 370 (2) Manner of making the change ........................................................................................................................................... 371 .06 Change to inventory price index computation (IPIC) method ............................................................................................... 371

(1) Description of change and scope ....................................................................................................................................... 371 (2) Manner of making the change ........................................................................................................................................... 371 (3) Bargain purchase ................................................................................................................................................................ 371

January 22, 2002 333 2002–3 I.R.B.

.07 Changes within inventory price index computation (IPIC) method ...................................................................................... 371

(1) Description of change and scope ....................................................................................................................................... 371 (2) Manner of making the change ........................................................................................................................................... 371

SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN SECURITIES (§ 475)........................ 371

.01 Reserved ................................................................................................................................................................................... 371 .02 Commodities dealers, securities traders, and commodities traders electing to use the mark-to-market

method of accounting under § 475(e) or (f). ......................................................................................................................... 371 (1) Description of change ........................................................................................................................................................ 371 (2) Scope ................................................................................................................................................................................... 372

SECTION 11. BANK RESERVES FOR BAD DEBTS (§ 585) ...................................................................................................... 372

.01 Changing from the § 585 reserve method to the § 166 specific charge-off method ............................................................ 372

(1) Description of change and scope ....................................................................................................................................... 372 (2) Section 481(a) adjustment .................................................................................................................................................. 372 (3) Change from § 585 required when electing S corporation status .................................................................................... 372 .02 Reserved ................................................................................................................................................................................... 372

SECTION 11A. INCOME FROM SOURCES WITHIN THE UNITED STATES (§ 861)............................................................. 372

.01 Transactions involving computer programs ............................................................................................................................ 372 .02 Reserved ................................................................................................................................................................................... 372

SECTION 11B. FUNCTIONAL CURRENCY (§ 985)..................................................................................................................... 372

.01 Change in functional currency................................................................................................................................................. 372

(1) Description of change and scope ....................................................................................................................................... 372 (2) Manner of making change ................................................................................................................................................. 372 .02 Reserved ................................................................................................................................................................................... 372

SECTION 12. ORIGINAL ISSUE DISCOUNT (§§ 1272, 1273).................................................................................................... 372

.01 De minimis original issue discount (OID) .............................................................................................................................. 372

(1) Description of change and scope ....................................................................................................................................... 372 (2) Manner of making the change ........................................................................................................................................... 372 (3) Additional requirements ...................................................................................................................................................... 373 (4) No audit protection ............................................................................................................................................................. 373 .02 Reserved ................................................................................................................................................................................... 373

SECTION 12A. MARKET DISCOUNT BONDS (§ 1278) ............................................................................................................. 373

.01 Revocation of § 1278(b) election............................................................................................................................................ 373

(1) Description of change and scope ....................................................................................................................................... 373 (2) Revocation of election ........................................................................................................................................................ 373 (3) Manner of making the change ........................................................................................................................................... 373 (4) Additional requirements ...................................................................................................................................................... 373 (5) Audit protection .................................................................................................................................................................. 373 .02 Reserved ................................................................................................................................................................................... 373

SECTION 13. SHORT-TERM OBLIGATIONS (§ 1281)................................................................................................................. 373

.01 Interest income on short-term obligations............................................................................................................................... 373

(1) Description of change and scope ....................................................................................................................................... 373 (2) Section 481(a) adjustment period ...................................................................................................................................... 373 .02 Stated interest on short-term loans of cash method banks..................................................................................................... 373

(1) Description of change and scope ....................................................................................................................................... 373 (2) Change for prior taxable years ......................................................................................................................................... 374 (3) Section 481(a) adjustment period ...................................................................................................................................... 374