SECTION 8. TAXABLE YEAR — Internal Revenue Bulletin 2002-3

DEDUCTION (§ 461)

.01 Timing of incurring liabilities for employee compensation .

(1) Self-insured employee medical benefits .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting to treat an obligation to pay an employee’s medical expenses that is neither insured nor paid from a welfare benefit fund within the meaning of § 419(e) as a liability incurred in the taxable year in which the employee files the claim with the employer. See United States v. Gen- eral Dynamics Corp., 481 U.S. 239 (1987) (1987–2 C.B. 134).

(b) Inapplicability . This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.01 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(2) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, direct labor costs must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A–1(e)(2)(i)(B). A taxpayer may

not rely on the provisions of section 8.01 of this APPENDIX to take a current year deduction.

.02 Timing of incurring liabilities for real property taxes, personal property taxes and state income taxes .

(1) Description of change . An accrual method taxpayer generally incurs a liability in the taxable year that all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability. See § 1.446–1(c)(1)(ii). Under § 1.461– 4(g)(6), if the liability of the taxpayer is to pay a tax, economic performance occurs as the tax is paid to the government authority that imposed the tax.

(1) Description of change and scope .

(2) Scope .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting to:

(i) treat liabilities (for which the all events test of § 461(h)(4) is otherwise met) for real property taxes, personal property taxes, or state income taxes as incurred in the taxable year in which the taxes are paid, under §§ 461 and 1.461– 4(g)(6); (ii) account for real property taxes, personal property taxes or state income taxes under the recurring item exception to the economic performance rules under §§ 461(h)(3) and 1.461– 5(b)(1); or (iii) revoke an election under § 461(c) (ratable accrual election).

(b) Inapplicability . This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.02 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(3) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, certain real property taxes must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A–1(e)(3)(ii)(L). A taxpayer may

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting for self-insured liabilities (including any amounts not covered by insurance, such as a “deductible” amount under an insurance policy) arising under any workers’ compensation act or out of any tort, breach of contract, or violation of law, to treating the liability for the workers’ compensation, tort, breach of contract, or violation of law as being incurred in the taxable year in which all the events have occurred which establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and payment is made to the person to which the liability is owed. See §§ 461 and 1.461–4(g)(2). (b) Inapplicability . This change does not apply:

(i) to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.03 of this APPENDIX, if the taxpayer is not capitalizing the costs as required;

(ii) if payment is made to a third party rather than to the person to which the liability is owed. See § 1.461–4(g)(1); or

(iii) if payment is made by a third party.

(2) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, certain employee benefit costs (including workers’ compensation) must be included in inventory costs and may be recovered through costs of goods sold. See § 1.263A–1(e)(3)(ii)(D). A taxpayer may not rely on the provisions of section 8.03 of this APPENDIX to take a current year deduction.

.04 Timing of incurring liabilities for payroll taxes .

January 22, 2002 365 2002–3 I.R.B.

(1) Applicability . This change applies to:

(a) an accrual method employer that wants to change its method of accounting for

(i) FICA and FUTA taxes to a method consistent with the holding in Rev. Rul. 96–51 (1996–2 C.B. 36) (Rev. Rul. 96–51 holds that, under the all events test of § 461, an accrual method employer may deduct in Year 1 its otherwise deductible FICA and FUTA taxes imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met); and

(ii) state unemployment taxes and, in the event the taxpayer is an employer within the meaning of the Railroad Retirement Tax Act ( see § 3231(a)), railroad retirement taxes to a method under which the taxpayer may deduct in Year 1 its otherwise deductible state unemployment taxes and railroad retirement taxes (if applicable) imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met (including the requirement that, as of the end of the taxable year, all events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy, see § 1.461–5(b)); or

(b) an accrual method employer that utilizes a method of accounting for FICA and FUTA taxes that is consistent with the holding in Rev. Rul. 96–51 (1996–2 C.B. 36) and wishes to change its method of accounting for state unemployment taxes and, in the event the employer is an employer within the meaning of the Railroad Retirement Tax Act ( see § 3231(a)), railroad retirement taxes to a method under which the taxpayer may deduct in Year 1 its otherwise deductible state unemployment taxes and railroad retirement taxes (if applicable) imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met (including the requirement that, as of the end of the taxable year, all events have occurred that establish the fact of the liability and the amount of the liability can be determined with reasonable accuracy, see § 1.461– 5(b)).

(2) Inapplicability . This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.04 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(3) Recurring item exception . A taxpayer that previously has not changed to or adopted the recurring item exception for FICA, FUTA, state unemployment taxes and railroad retirement taxes (if applicable) must change to the recurring item exception method for FICA, FUTA, state unemployment taxes and railroad retirement taxes (if applicable) as specified in § 461(h)(3) as part of this change.

(4) Amounts taken into account . Applicable provisions of the Code, regulations, and other published guidance prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, certain taxes must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A–1(e)(3)(ii)(L). A taxpayer may not rely on the provisions of section 8.04 of this APPENDIX to take a current year deduction.

(a) Description of change and scope . This change applies to taxpayers that wish to change their method of accounting for distributor commissions (as defined by § 2 of Rev. Proc. 2000–38, 2000–40 I.R.B. 310) to the distribution fee period method, the 5–year method, or the useful life method (all described in Rev. Proc. 2000–38) for the taxpayer’s taxable year that includes January 1, 2001. (b) Inapplicability . This change does not apply to an amortizable section 197 intangible (including any property for which a timely election under § 13261(g)(2) of the 1993 Act was made).

.05 Cooperative advertising .

(1) Description of change and scope . This change applies to a taxpayer that wants to change its method of accounting for cooperative advertising costs to a method consistent with the holding in Rev. Rul. 98–39 (1998–2 C.B. 198). Rev. Rul. 98–39 generally provides that, under the all events test of § 461, an accrual method manufacturer’s liability to pay a retailer for cooperative advertising services is incurred in the year in which the services are performed, provided the manufacturer is able to reasonably estimate this liability, and even though the retailer does not submit the required claim form until the following year.

(2) Scope limitations inapplicable . A taxpayer that wants to make this change for its first or second taxable year ending on or after August 17, 1998, is not subject to the scope limitations in section 4.02 of this revenue procedure.

(i) A taxpayer that files a copy of its application for this change with the national office on or before April 2, 2001 is not subject to the scope limitations in section 4.02 of this revenue procedure, unless the taxpayer’s method of accounting for distributor commissions is an issue under consideration before a federal court within the meaning of section 3.09(3) of this revenue procedure. (ii) If the taxpayer’s method of accounting for distributor commissions is an issue pending at the time that a Form 3115 is filed with the national office, the taxpayer also must provide to the examining agent or appeals officer, as appropriate, an executed closing agreement substantially in the form set forth in APPENDIX A of Rev. Proc. 2000–38. For purposes of this change, the taxpayer’s method of accounting for distributor commissions is an issue pending if the Service has given the taxpayer written notification indicating an adjustment is being made or will be proposed with respect to the taxpayer’s method of accounting for distributor commissions. This will normally 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.

(d) Manner of making the change .

.06 Distributor commissions .

(1) Changes made under Rev. Proc. 2000–38 .

(i) Cut-off method . The change must be made using a cut-off method, and applies only to distributor commissions paid or incurred on or after January 1, 2001. Because no items are duplicated or omitted from income when a cut-off method is used, a § 481(a) adjustment

2002–3 I.R.B. 366 January 22, 2002

described in § 5.03 of this revenue procedure is not necessary. See section 2.06 of this revenue procedure.

(ii) Year of change . The year of change is the taxpayer’s taxable year that includes January 1, 2001.

(iii) Filing requirements . Notwithstanding section 6.02(3)(a) of this revenue procedure, a taxpayer making this change may file the required copy of its application with the national office before the first day of the year of change if the taxpayer otherwise properly files its application under Rev. Proc. 2000–38.

(e) Audit protection . If a taxpayer complies with the requirements of Rev. Proc. 2000–38 and this revenue procedure for changing its method of accounting for distributor commissions to any of the three methods of accounting described in Rev. Proc. 2000–38, the treatment of distributor commissions will not be raised as an issue in any taxable year before the year of change and, if the treatment of distributor commissions has already been raised as an issue in a taxable year before the year of change, the treatment of distributor commissions will not be further pursued.

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

(a) Change from deducting to capi- talizing distributor commissions .

(i) Description of change and scope . This section 8.06(2)(a) applies to a taxpayer that wishes to change from currently deducting distributor commissions (as defined by section 2 of Rev. Proc. 2000–38, 2000–40 I.R.B. 310) to a method of capitalizing and amortizing distributor commissions using the distribution fee period method, the 5–year method, or the useful life method (all described in Rev. Proc. 2000–38) for a taxable year other than the taxpayer’s taxable year that includes January 1, 2001).

(ii) Inapplicability . This change does not apply to an amortizable section 197 intangible (including any property for which a timely election under § 13261 (g)(2) of the 1993 Act was made.

(iii) Manner of making the change . The change under this section 8.06(2)(a) must be made using the cut-off method, and applies only to distributor commissions paid or incurred on or after the first day of the year of change. Because no items are duplicated or omit

ted from income when a cut-off method is used, a § 481(a) adjustment described in § 5.03 of this revenue procedure is not necessary. See section 2.06 of this revenue procedure.

(b) Other changes . See section 2.02 of this APPENDIX for (i) changing from one method described in Rev. Proc. 2000–38 for amortizing distributor commissions (as defined by section 2 of Rev. Proc. 2000–38, 2000–40 I.R.B.310) to another method described in Rev. Proc. 2000–38 for amortizing distributor commissions, or (ii) changing from pooling to a single asset, or vice versa, for distributor commissions for which the taxpayer is using the distribution fee period method or the useful life method (both described in Rev. Proc. 2000–38).