SECTION 13. DEFERRED

COMPENSATION (§ 404)

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

or Kari Fisher at 202–622–4970 (not a toll-free call).

.03 Change to no longer capitalize re- search and experimental expenditures un- der § 263A .

(1) Description of change . The change applies to a taxpayer who no longer wants to capitalize research and experimental expenditures to inventory under § 263A and the regulations thereunder. A taxpayer making this change must be in compliance with all other aspects of § 263A and the regulations thereunder and must have an effective election under either § 174(a) or (b).

(2) Manner of making change . A taxpayer must attach to its Form 3115 the following representations:

(a) “The § 174 costs that are the subject of this Form 3115 filed under section 11.03 of the APPENDIX of Rev. Proc. 2008–52 and will not be capitalized to inventory under § 263A and the regulations thereunder are costs that are subject to the taxpayer’s effective election under [ Insert, as appro- priate : § 174(a) or § 174(b)] and the regulations thereunder” and

(b) “All § 174 costs that will be removed from inventory costs, have been identified as § 174 costs at the time that the costs were capitalized to inventory under § 263A and the regulations thereunder.”

(3) No audit protection . A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 11.03 of this APPENDIX is “24.” See section 6.02(4) of this revenue procedure.

(5) 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).

.04 Impact fees .

(1) Description of change . This change applies to a taxpayer that incurs impact fees as defined in Rev. Rul. 2002–9, 2002–1 C.B. 614, in connection with the construction of a new residential rental building that wants to capitalize the costs to the building under §§ 263(a) and 263A.

See Rev. Rul. 2002–9 for further information.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 11.04 of this APPENDIX is “25.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Cheryl Oseekey at 202–622–4970 (not a toll-free call).

.05 Change to capitalizing environmen- tal remediation costs under § 263A .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for environmental remediation costs from a method that does not comply with the holding in Rev. Rul. 2004–18, 2004–1 C.B. 509, to capitalizing them to inventory under § 263A.

(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 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 11.05 of this APPENDIX is “77.” 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).

.06 Change in allocating environmental remediation costs under § 263A.

(1) Description of change . This change applies to a taxpayer that capitalizes environmental remediation costs to inventory under § 263A, but allocates these costs to inventory using a method of accounting that does not comply with the holding in Rev. Rul. 2005–42, 2005–2 C.B. 67, and wants to change to allocating these costs to inventory produced during the taxable year in which the costs are incurred under § 263A. See Rev. Rul. 2005–42 for further information.

2008–36 I.R.B. 645 September 8, 2008

is received by the employee after the 15 ^th

day of the 3 ^rd calendar month after the end of that taxable year, to treat the vacation pay as capitalizable (within the meaning of § 1.263A–1(c)(3)) in the taxable year of the employer in which the vacation pay is paid to the employee.

(b) Inapplicability . This change does not apply to the extent that it is also described in section 13.01 of this APPENDIX.

This change also does not apply to a taxpayer that is required under § 263A and the regulations thereunder to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under this section 13.02 of the APPENDIX if the taxpayer is not capitalizing these costs, unless the taxpayer concurrently changes its method to capitalize these costs in conjunction with a change to a UNICAP method under section 11.01 or 11.02 of this APPENDIX (as applicable).

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 13.02 of this APPENDIX is “28.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Maryellen Simpson at 202–622–6030 (not a toll-free call).

.03 Grace period contributions .

(1) Description of change . This change applies to a taxpayer that wants to cease deducting contributions made during the § 404(a)(6) grace period to a qualified cash or deferred arrangement within the meaning of § 401(k) or to a defined contribution plan as matching contributions with the meaning of § 401(m) when the contributions are attributable to compensation earned by plan participants after the end of a taxable year as required by Rev. Rul. 2002–46, 2002–2 C.B. 117, as modified by Rev. Rul. 2002–73, 2002–2 C.B. 805.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 13.03 of this APPENDIX is “29.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact James Holland at

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting to comply with § 404(a)(11). Section 404(a)(11) provides that, for purposes of determining under § 404 whether compensation of an employee is deferred compensation and when deferred compensation is paid, no amount is treated as received by the employee, or paid, until it is actually received by the employee. Section 404(a)(11) overturns the decision in Schmidt Baking Co., Inc. v. Commissioner, 107 T.C. 271 (1996), in which the court held that a § 83(a) income inclusion event upon securitization of vacation and severance pay benefits with a letter of credit constitutes receipt of those benefits by employees for purposes of determining whether an employer’s deduction for the benefits is subject to § 404. See Notice 99–16, 1999–1 C.B. 842.

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

(3) Section 481(a) adjustment period . A taxpayer must take the § 481(a) adjustment into account ratably over three taxable years beginning with the year of change.

(4) No audit protection . A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 13.01 of this APPENDIX is “27.” See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact Maryellen Simpson at 202–622–6030 (not a toll-free call).

.02 Deferred compensation .

(1) Description of change . This change applies to an accrual method taxpayer that wants to change its method of accounting to treat bonuses or vacation pay as follows ( see § 404(a)(5) and § 1.404(b)–1T, Q&A 2):

(a) Applicability .

(i) Bonuses .

(A) Bonuses not subject to capitaliza- tion under § 263A . If by the end of the tax

able year all the events have occurred that establish the fact of the liability to pay a bonus and the amount of the liability can be determined with reasonable accuracy ( see § 1.446–1(c)(1)(ii)), and the bonus is otherwise deductible, but the bonus is received by the employee after the 15 ^th day of the 3 ^rd calendar month after the end of that taxable year, to treat the bonus as deductible in the taxable year of the employer in which or with which ends the taxable year of the employee in which the bonus is includible in the gross income of the employee; or

(B) Bonuses that are subject to capital- ization under § 263A . If by the end of the taxable year all the events have occurred that establish the fact of the liability to pay a bonus and the amount of the liability can be determined with reasonable accuracy ( see § 1.446–1(c)(1)(ii)), and the bonus is otherwise deductible (without regard to § 263A), but the bonus is received by the employee after the 15 ^th day of the 3 ^rd calendar month after the end of that taxable year, to treat the bonus as capitalizable (within the meaning of § 1.263A–1(c)(3)) in the taxable year of the employer in which or with which ends the taxable year of the employee in which the bonus is includible in the gross income of the employee.

(ii) Vacation pay .

(A) Vacation pay not subject to capital- ization under § 263A . If by the end of the taxable year all the events have occurred that establish the fact of the liability to pay vacation pay and the amount of the liability can be determined with reasonable accuracy ( see § 1.446–1(c)(1)(ii)), and the vacation pay is otherwise deductible but the vacation pay is received by the employee after the 15 ^th day of the 3 ^rd calendar month after the end of that taxable year, to treat the vacation pay as deductible in the taxable year of the employer in which the vacation pay is paid to the employee; or

(B) Vacation pay that is subject to capi- talization under § 263A . If by the end of the taxable year all the events have occurred that establish the fact of the liability to pay vacation pay and the amount of the liability can be determined with reasonable accuracy ( see § 1.446–1(c)(1)(ii)), and the vacation pay is otherwise deductible (without regard to § 263A), but the vacation pay

September 8, 2008 646 2008–36 I.R.B.

method of accounting is permitted to be changed automatically either under this revenue procedure or any other Code, regulation, or administrative provision, and ( b ) the change to the special method of accounting is requested for the identical taxable year of the change requested under this section 14.01 of the APPENDIX if the taxpayer is required to use the special method of accounting; and

(vii) a taxpayer engaged in two or more trades or businesses, unless the taxpayer makes such changes so that the same overall accrual method is used for each such trade or business beginning with the year of change.

(2) Scope limitations inapplicable . The scope limitations in section 4.02(6) of this revenue procedure do not apply to a change in method of accounting request made under section 14.01 of this APPENDIX when the taxpayer changed to the overall cash method within the previous 5 taxable years (including the year of change) either under the provisions of Rev. Proc. 2001–10, 2001–1 C.B. 272 or Rev. Proc. 2002–28, 2002–1 C.B. 815.

(3) Definitions . (a) Cash method of accounting is the method identified by § 446(c)(1) and §§ 1.446–1(c)(1)(i), 1.451–1(a), and 1.461–1(a)(1). (b) Accrual method of accounting is the method identified by § 446(c)(2) and §§ 1.446–1(c)(1)(ii), 1.451–1(a), and 1.461–1(a)(2). (c) Recurring item exception is the method described in § 461(h)(3) and § 1.461–5.

(d) UNICAP method specifically de- scribed in the regulations is one of the following:

(i) the specific identification method within the meaning of § 1.263A–1(f)(2);

(ii) the burden rate method within the meaning of § 1.263A–1(f)(3);

(iii) the standard cost method within the meaning of § 1.263A–1(f)(3);

(iv) the direct reallocation method within the meaning of § 1.263A–1(g)(4)(iii)(A);

(v) the step-allocation method within the meaning of § 1.263A–1(g)(4)(iii)(B);

(vi) the simplified service cost method within the meaning of § 1.263A–1(h); and

202–283–9699 or Carlton Watkins at 202–283–9625 (not toll-free calls).