SECTION 4. ADVANCE TRADE

DISCOUNT METHOD

.01 In General . A taxpayer within the scope of this revenue procedure is permitted to use the Advance Trade Discount Method of accounting. Under the Advance Trade Discount Method, an advance trade discount (as defined in section 4.03 of this revenue procedure) is not recognized as gross income under § 61 upon receipt. The advance trade discount generally is taken into account for federal income tax purposes in the amount of, in the manner of, and for the taxable year in which the taxpayer accounts for the discount in its applicable financial statements (as defined in section 4.06 of this revenue procedure). Thus, if a taxpayer reports an advance trade discount related to specific items of inventory in its applicable financial statements as a reduction to the cost of that inventory, the taxpayer must treat the discount as a trade or other discount under § 471 and reduce only the cost of the inventory to which the discount relates in the amount of, in the same manner as, and for the taxable year in which it reduces the cost of that inventory in its applicable financial statements. The taxpayer may not, for example, unwind the allocation made in its applicable financial statements and instead allocate the discount using the simplified resale method. Alternatively, if a taxpayer allocates an advance trade discount in its applicable financial statements exclusively to cost of goods sold, the taxpayer must treat the discount as a reduction to the cost of goods sold in the amount of and for the taxable year in which the discount is allocated to cost of goods sold in its applicable financial statements. However, a taxpayer must reduce the cost of the inventory to which the discount relates as the taxpayer purchases the inventory if that treatment results in the advance trade discount being recognized for federal in

come tax purposes earlier than when the taxpayer accounts for the discount in its applicable financial statements.

.02 Taxpayers Without Applicable Fi- nancial Statements . To use the Advance Trade Discount Method, a taxpayer within the scope of this revenue procedure that does not have applicable financial statements (as defined in section 4.06 of this revenue procedure) must reduce only the cost of the specific items of inventory to which the discount relates as the taxpayer purchases the inventory.

.03 Advance Trade Discounts. A payment received by a taxpayer is an advance trade discount if:

(1) The payment is received from a seller of merchandise in exchange for a commitment by the taxpayer to purchase a minimum amount of merchandise from the seller within a period that does not exceed 5 years from the date of the agreement; (2) Except as provided for in section 4.04 of this revenue procedure, the payment is intended to be a discount to the price of the merchandise to be purchased;

(3) The taxpayer is obligated, either in writing or because of industry custom, to repay an allocable portion, or all, of the payment if the underlying purchase commitment is not met; and

(4) The taxpayer does not treat the payment as a payment for services in its applicable financial statements (as defined in section 4.06 of this revenue procedure), if any.

.04 Exclusive Supplier Agreements and Shelving Allowances . Solely for purposes of the Advance Trade Discount Method, amounts allocable to exclusive supplier agreements and shelving (slotting) allowances included as part of a purchase commitment described in section 4.03(1) of this revenue procedure will be treated as advance trade discounts if the taxpayer is obligated to repay an allocable portion of those amounts if the underlying purchase commitment is not met and the requirements in sections 4.03(3) and (4) of this revenue procedure are satisfied.

.05 Allocable Payments. Except as provided for in section 4.04 of this revenue procedure, a taxpayer that receives a payment that is partially attributable to an advance trade discount described in section 4.03 of this revenue procedure may use the Advance Trade Discount Method only with respect to the portion of the payment

2007–30 I.R.B. 234 July 23, 2007

matic accounting method change number “111.”