SECTION 11. UNIFORM — Internal Revenue Bulletin 2008-36

CAPITALIZATION (UNICAP) METHODS (§ 263A)

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

(1) Description of change .

(a) Applicability . This change applies to:

(i) a small reseller of personal property that wants to change from a permissible UNICAP method to a permissible nonUNICAP inventory capitalization method in any taxable year that it qualifies as a small reseller;

(ii) a formerly small reseller that wants to change from a permissible non-UNICAP inventory capitalization method to a permissible UNICAP method in the first taxable year that it does not qualify as a small reseller;

(iii) a reseller-producer that wants to change from a permissible UNICAP method for both its production and resale activities to a permissible simplified resale method described in § 1.263A–3(d)(3) in any taxable year that it qualifies to use a simplified resale method for both its production and resale activities under § 1.263A–3(a)(4) (resellers with de min- imis production activities);

(iv) a reseller-producer that wants to change from a permissible simplified resale method described in § 1.263A–3(d)(3) for both its production and resale activities to a permissible UNICAP method for both its production and resale activities in the first taxable year that it does not qualify to use a simplified resale method for both its production and resale activities under § 1.263A–3(a)(4);

(v) a reseller that wants to change its permissible UNICAP method to include a special reseller cost allocation rule; or

(vi) a reseller that wants to change to a UNICAP method (or methods) specifically described in the regulations (and make any attendant changes in the identification of costs subject to § 263A and

including any special reseller cost allocation rules) in any taxable year, other than the first taxable year, that it does not qualify as a small reseller. However, this does not include a change for purposes of recharacterizing “section 471 costs” as “additional § 263A costs” (or vice versa ) under the simplified resale method.

(b) Inapplicability .

(i) Self-constructed assets . This change does not apply to a taxpayer that wants to use either the simplified service cost method or the simplified production method for self-constructed assets under §§ 1.263A–1(h)(2)(i)(D) and 1.263A–2(b)(2)(i)(D).

(ii) Historic absorption ratio . This change does not apply to a taxpayer that wants to make an historic absorption ratio election under §§ 1.263A–2(b)(4) or 1.263A–3(d)(4), or to a taxpayer that wants to revoke an election to use the historic adsorption ratio with the simplified resale method ( see § 1.263A–3(d)(4)(iii)(B)), including a taxpayer using the simplified resale method with an historic adsorption ratio that wants to change to a UNICAP method specifically described in the regulations that does not include the historic absorption ratio. However, this change applies to a small reseller that wants to change from the historic absorption ratio with the simplified resale method to a permissible non-UNICAP inventory capitalization method under section 11.01(1)(a)(i) of this APPENDIX.

(c) Scope limitations inapplicable . The scope limitations of section 4.02 of this revenue procedure do not apply to this change.

(2) Definitions . (a) “Reseller” means a taxpayer that acquires real or personal property described in § 1221(a)(1) for resale.

(b) “Small reseller” means a reseller whose average annual gross receipts for the three immediately preceding taxable years (or fewer, if the taxpayer has not been in existence for the three preceding taxable years) do not exceed $10,000,000. See § 263A(b)(2)(B).

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(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 11.01 of this APPENDIX is “22.” See section 6.02(4) of this revenue procedure.

Current Taxable Year

(6) Example . The following example illustrates the principles of section 11.01 of this APPENDIX for small resellers and formerly small resellers.

Assume X, a corporate reseller of personal property, incorporated January 2, 2001, adopted a taxable

AVERAGE Annual Gross Receipts for the Three Taxable Years Immediately Preceding the Current Taxable Year

year ending December 31. X determines that its average annual gross receipts for the three taxable years (or fewer, if applicable) immediately preceding taxable years 2001 through 2010 are as shown in the table below:

2001 $ 0 2002 5,000,000 2003 6,000,000 2004 7,000,000 2005 11,000,000 2006 11,000,000 2007 9,000,000 2008 8,000,000 2009 11,000,000 2010 12,000,000

Furthermore, X which adopted the dollar-value LIFO inventory method, has the following LIFO in

ventory balances determined without considering the effects of the UNICAP method:

Beginning Ending

2005 $1,000,000 $1,100,000 2006 1,100,000 1,200,000 2007 1,200,000 1,300,000 2008 1,300,000 1,400,000 2009 1,400,000 1,500,000 2010 1,500,000 1,600,000

X was required by § 263A to change to the UNICAP method for 2005 because its average annual gross receipts for the three taxable years immediately preceding 2005 were $11,000,000, which exceeded the $10,000,000 ceiling permitted by the small reseller exception. Assume that X was required to capitalize $80,000 of “additional § 263A costs” to the cost of its 2005 beginning inventory because

of this change in inventory method. In addition, X was required to include one-fourth of the § 481(a) adjustment when computing taxable income for each of the four taxable years beginning with 2005. Thus, X was required to include a $20,000 positive § 481(a) adjustment in its 2005 taxable income.

X elected to use the simplified resale method without an historic absorption ratio election under

§ 1.263A–3(d)(3) for determining the amount of additional § 263A costs to be capitalized to each LIFO layer. Assume that X was required to add $10,000 of additional § 263A costs to the cost of its 2005 ending inventory because of the $100,000 increment for 2005.

X ’s 2005 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,000,000 2005 Increment 100,000 Additional § 263A Costs in Beginning Inventory 80,000 Additional § 263A Costs in 2005 Increment 10,000 Total 2005 Ending Inventory $1,190,000

X ’s Unamortized 2005 § 481(a) Adjustment:

2005 § 481(a) Adjustment $80,000 Amount included in 2005 Taxable Income <20,000> Unamortized 2005 § 481(a) Adjustment–12/31/05 $60,000

Because X failed to satisfy the small reseller exception for 2006, X was required to continue using the UNICAP method for its inventory costs. Further

more, X was required to include $20,000 of the unamortized 2005 positive § 481(a) adjustment in 2006 taxable income. Assume that X was required to add

$10,000 of additional § 263A costs to the cost of its 2006 ending inventory because of the $100,000 increment for 2006.

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X ’s 2006 Ending Inventory:

Beginning Inventory (With UNICAP costs) $1,190,000 2006 Increment 100,000 Additional § 263A Costs in 2006 Increment 10,000 Total 2006 Ending Inventory $1,300,000

X ’s Unamortized 2005 § 481(a) Adjustment:

Unamortized 2005 § 481(a) Adjustment–12/31/05 $60,000 Amount Included in 2006 Taxable Income <20,000> Unamortized 2005 § 481(a) Adjustment–12/31/06 $40,000

Because X satisfies the small reseller exception for 2007, X may change voluntarily from the UNICAP method to a permissible non-UNICAP inventory capitalization method under section 11.01 of this APPENDIX. To reflect the removal of the

additional § 263A costs from the cost of its 2007 beginning inventory, X must compute a corresponding § 481(a) adjustment, which is a negative $100,000 ($1,200,000 - $1,300,000). The entire amount of this negative § 481(a) adjustment is included in the

computation of X ’s taxable income for 2007. In addition, X must include $20,000 of the unamortized 2005 § 481(a) adjustment in 2007 taxable income.

X ’s 2007 Ending Inventory:

Beginning Inventory (With UNICAP costs) $1,300,000 2007 Increment 100,000 2007 § 481(a) Adjustment <100,000> Total 2007 Ending Inventory $1,300,000

X ’s Unamortized 2005 § 481(a) Adjustment:

Unamortized 2005 § 481(a) Adjustment–2/31/06 $40,000 Amount included in 2007 Taxable Income <20,000> Unamortized 2005 § 481(a) Adjustment–12/21/07 $20,000

X ’s Unamortized 2007 § 481(a) Adjustment:

2007 § 481(a) Adjustment $<100,000> Amount included in 2007 Taxable Income 100,000 Unamortized 2007 § 481(a) Adjustment–12/31/07 $ 0

X also satisfies the small reseller exception for UNICAP method for 2008. X, however, must include $20,000 of the unamortized 2005 positive § 481(a) 2008 and, therefore, is not required to return to the adjustment in its 2008 taxable income.

X ’s 2008 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,300,000 2008 Increment 100,000 Total 2008 Ending Inventory $1,400,000

X ’s Unamortized 2005 § 481(a) Adjustment:

Unamortized 2005 § 481(a) Adjustment–12/31/07 $20,000 Amount in 2008 Taxable Income <20,000> Unamortized 2005 § 481(a) Adjustment–12/31/08 $ 0

X ’s Unamortized 2009 § 481(a) Adjustment:

In 2009, X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method as provided under section 11.01 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 2009 beginning inventory because of this change in inventory method. Because X used a non-UNICAP method for two taxable years prior to 2009, 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 2009 and 2010. Assume that X must add $10,000 of additional § 263A costs to the cost of its 2009 ending inventory because of the $100,000 increment for 2009.

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X ’s 2009 Ending Inventory:

Beginning Inventory (Without UNICAP costs) $1,400,000 2009 Increment 100,000 Additional § 263A costs in Beginning Inventory 120,000 Additional § 263A costs in 2009 Increment 10,000 Total 2009 Ending Inventory $1,630,000

X ’s Unamortized 2009 § 481(a) Adjustment:

2009 § 481 Adjustment $120,000 Amount included in 2009 Taxable Income <60,000> Unamortized 2009 § 481(a) Adjustment–12/31/09 $60,000

Because X fails to satisfy the small reseller exception for 2010, X must continue using the UNICAP method for its inventory costs. Furthermore, X is re

quired to include $60,000 of the unamortized 2009 positive § 481(a) adjustment in 2010 taxable income. Assume that X is required to add $10,000 of addi

tional § 263A costs to the cost of its 2010 ending inventory because of the $100,000 increment for 2010.

X ’s 2010 Ending Inventory:

Beginning Inventory (With UNICAP costs) $1,630,000 2010 Increment 100,000 Additional § 263A Costs in 2010 Increment 10,000 Total 2010 Ending Inventory $1,740,000

X ’s Unamortized 2009 § 481(a) Adjustment:

Unamortized 2009 § 481(a) Adjustment–12/31/09 $60,000 Amount included in 2010 Taxable Income <60,000> Unamortized 2009 § 481(a) Adjustment–12/31/10 $ 0

(§ 1.263A–1(f)(2)), the burden rate method (§ 1.263A–1(f)(3)), the standard cost method (§ 1.263A–1(f)(3)), the direct reallocation method (§ 1.263A–1(g)(4)(iii)(A)), the step-allocation method (§ 1.263A–1(g)(4)(iii)(B)), the simplified service cost method (§ 1.263–1(h)) (with either a labor-based allocation ratio or a production cost allocation ratio), and the simplified production method without the historic absorption ratio election (§ 1.263A–2(b)), but does not include any other reasonable allocation method within the meaning of § 1.263A–1(f)(4).

(3) Multiple changes . A taxpayer that wants to make both this change and another change in method of accounting in the same year of change must comply with the ordering rules of § 1.263A–7(b)(2).

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 11.02 of this APPENDIX is “23.” See section 6.02(4) of this revenue procedure.

(5) Contact information . For further information regarding a change under this section, contact Donna Crawford

(7) Contact information . For further information regarding a change under this section, contact Donna Crawford or Kari Fisher at 202–622–4970 (not a toll-free call).

.02 Certain uniform capitalization (UNICAP) methods used by producers and reseller-producers .

(1) Description of change.

(a) Applicability . This change applies to a producer (as defined in section 11.01(2)(d) of this APPENDIX) or a reseller-producer (as defined in section 11.01(2)(e) of this APPENDIX) that wants to change to a UNICAP method (or methods) specifically described in the regulations and includes any changes in the identification of costs subject to § 263A made in connection therewith. However, this does not include a change for purposes of recharacterizing “section 471 costs” as “additional § 263A costs” (or vice versa ) under the simplified production method.

(b) Inapplicability . ¹ /3 This change does not apply to a producer or reseller-producer that wants to revoke an election to use the historic absorption ratio with the simplified production method ( see

§ 1.263A–2(b)(4)(iii)(B)), including a taxpayer using the simplified production method with an historic absorption ratio changing to a UNICAP method specifically described in the regulations that does not include the historic absorption ratio. This change also does not apply to a taxpayer that wants to use either the simplified service cost method of the simplified production method for self-constructed assets under §§ 1.263A–1(h)(2)(i)(D) and 1.263A–2(b)(2)(i)(D). Also, this change does not apply to a producer or reseller-producer that wants to change its method of accounting for interest capitalization.

(2) Definition . A “UNICAP method specifically described in the regulations” includes the 90–10 de minimis rule to allocate a mixed service department’s costs to production or resale activities (§ 1.263A–1(g)(4)(ii)), the 1/3 - 2/3 rule to allocate labor costs of personnel to purchasing activities (§ 1.263A–3(c)(3)(ii)(A)), the 90–10 de minimis rule to allocate a dual-function storage facility’s costs to property acquired for resale (§ 1.263A–3(c)(5)(iii)(C)), the specific identification method

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(2) Concurrent automatic changes . A taxpayer that wants to make both this change and another automatic change in method of accounting under § 263A for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2).

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 11.06 of this APPENDIX is “92.” See section 6.02(4) of this revenue procedure.

(4) Contact information . For further information regarding a change under this section, contact John Faron at 202–622–4930 (not a toll-free call).