SECTION 2. CHANGES — Internal Revenue Bulletin 2002-13

.01 Changes to BACKGROUND Sec- tions . Section 2.01(3) in each of Rev. Proc. 97–27 and Rev. Proc. 2002–9 is deleted.

.02 Changes to § 481(a) Spread Period for Negative § 481(a) Adjust- ments .

(1) Section 5.02(3)(a) of Rev. Proc. 97–27 is modified to read as follows: “(a) In general . Except as otherwise provided in sections 5.02(3)(b) and 7.03 of this revenue procedure, the § 481(a) adjustment period is four taxable years for a net positive adjustment for an accounting method change, and one taxable year for a net negative adjustment for an accounting method change.”

(2) Section 5.04(1) of Rev. Proc. 2002–9 is modified to read as follows: “(1) In general . Except as otherwise provided in section 5.04(3) or the APPENDIX of this revenue procedure, the § 481(a) adjustment period is four taxable years for a net positive adjustment for an accounting method change, and one taxable year for a net negative adjustment for an accounting method change.”

(3) The second sentence in both Example 1 and Example 2 in section 7.02 of Rev. Proc. 97–27 and section 5.04(2) of Rev. Proc. 2002–9 is modified to read as follows:

“The net § 481(a) adjustment for this method change is a positive adjustment of $30,000 and the adjustment period is four taxable years.”

(4) Section 7.03(1) of Rev. Proc. 97–27 and section 5.04(3)(a) of Rev. Proc. 2002–9 are each modified to read as follows:

“De minimis rule. A taxpayer may elect to use a one-year adjustment period in lieu of the § 481(a) adjustment period otherwise provided by this revenue procedure for positive adjustments if the net § 481(a) adjustment for the change is less than $25,000. The taxpayer must complete the appropriate line on the Form 3115 to elect this de minimis rule.” (5) Section 4.01(3) of the APPENDIX of Rev. Proc. 2002–9 (relating to the § 481(a) adjustment for certain uniform capitalization methods used by resellers

“(5) Example .

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

2002-13 I.R.B. 696 April 1, 2002

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 100,000 Unamortized 1997 § 481(a) Adjustment—12/31/97 $ 0

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 in its 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

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. Because X used a non-UNICAP for two taxable years prior to 1999, the § 481 spread period for the positive § 481(a) adjustment is two years. Therefore, X must include one-half of the § 481(a) adjustment ($60,000) when computing taxable income for 1999 and 2000. 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

April 1, 2002 697 2002-13 I.R.B.

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 Increment 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

.03 Changes to Scope Restrictions for Taxpayers Under Examination, or Before an Area Appeals Office or a Federal Court.

(1) Taxpayers under examination .

(a) Section 4.02(2) of Rev. Proc. 97–27 (relating to the situations in which Rev. Proc. 97–27 does not apply) is modified to read as follows:

“(2) Under examination . If the taxpayer is under examination, except as provided in sections 6.01(2) (90-day window), 6.01(3) (120-day window), 6.01(4) (director consent), and 6.01(5) (issue pending) of this revenue procedure.”

(b) Section 6.01 of Rev. Proc. 97–27 (relating to procedures for taxpayers under examination) is modified as follows:

“(1) In general . A taxpayer that is under examination may not file a Form 3115 to request a change in accounting method under this revenue procedure except as provided in sections 6.01(2) (90-day window), 6.01(3) (120-day window), 6.01(4) (director consent), and 6.01(5) (issue pending). A taxpayer that files a Form 3115 beyond the time periods provided in the 90-day and 120-day windows will not be granted an extension of time to file under § 301.9100, except in unusual and compelling circumstances.”

- - “(5) Issue Pending . (a) A taxpayer

that is under examination with respect to any income tax issue may request to

change a method of accounting if the method of accounting to be changed is an issue pending for any taxable year under examination. However, the audit protection provisions of section 9.01 of this revenue procedure do not apply to a taxpayer changing its method of accounting under this section 6.01(5). For this purpose, an issue is pending for taxable years under examination 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. This notification normally will occur after the Service has gathered information sufficient to determine that an adjustment is appropriate and justified, although the exact amount of the adjustment may not yet be determined.

(b) A taxpayer that requests to change a method of accounting under this section 6.01(5) must provide a copy of the Form 3115 to the examining agent(s) at the same time it files the original Form 3115 with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent(s). In order to assist in processing an application under this section 6.01(5), the taxpayer should type or legibly write “Issue pending” on the Form 3115.”

(c) Section 4.02(1) of Rev. Proc. 2002–9 (relating to situations in which Rev. Proc. 2002–9 does not apply) is modified to read as follows:

“(1) Under examination . If, on the date the taxpayer would otherwise file a copy of the application with the national office, the taxpayer is under examination (as provided in section 3.08 of this revenue procedure), except as provided in sections 6.03(2) (90-day window), 6.03(3) (120-day window), 6.03(4) (director consent), 6.03(5) (changes lacking audit protection), and 6.03(6) (issue pending) of this revenue procedure.”

(d) Section 6.03 of Rev. Proc. 2002–9 (relating to procedures for taxpayers under examination) is modified as follows:

“(1) In general . Except as otherwise provided in the APPENDIX of this revenue procedure (see, for example, section 1.01 of the APPENDIX of this revenue procedure), a taxpayer that is under examination may file an application to change a method of accounting under section 6 of this revenue procedure only if the taxpayer is within the provisions of section 6.03(2) (90-day window), 6.03(3) (120-day window), 6.03(4) (director consent), 6.03(5) (changes lacking audit protection), or 6.03(6) (issue pending) of this revenue procedure. A taxpayer that files an application beyond the time periods provided in the 90-day and 120-day windows is not eligible for the automatic extension of time and will not be granted an extension of time to file under § 301.9100, except in unusual and compelling circumstances.”

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2002-13 I.R.B. 698 April 1, 2002

accounting method to be changed is an issue under consideration by the federal court. A taxpayer that requests to change a method of accounting under this section 6.03 must provide a copy of the Form 3115 to the counsel(s) for the government at the time it files the original Form 3115 with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the counsel(s) for the government. In order to assist in processing an application under this section 6.03, the taxpayer should type or legibly write “Issue under consideration” on the Form 3115.” (c) Section 4.02(3) of Rev. Proc. 2002–9 (relating to situations to which Rev. Proc. 2002–9 does not apply) is deleted.

(d) Section 6.05 of Rev. Proc. 2002–9 (relating to procedures for taxpayers before a federal court) is modified to read as follows:

.05 Taxpayer before a federal court . A taxpayer otherwise within the scope of this revenue procedure that is before a federal court with respect to any income tax issue may request a change in accounting method. However, the audit protection provisions of section 7.01 of this revenue procedure do not apply if the accounting method to be changed is an issue under consideration by the federal court. A taxpayer that requests to change a method of accounting under this section 6.05 must provide a copy of the Form 3115 to the counsel(s) for the government at the time it files the original Form 3115 with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the counsel(s) for the government. In order to assist in processing an application under this section 6.05, the taxpayer should type or legibly write “Issue under consideration” on the Form 3115.” .04 Notional Principal Contracts . Section 14.02 of Rev. Proc. 97–27 (relating to Designated A treatment for changes in method of accounting for notional principal contracts) is deleted.