SECTION 19. TAXABLE — Internal Revenue Bulletin 2008-36

DEDUCTION (§ 461)

.01 Timing of incurring liabilities for employee compensation .

(1) Self-insured employee medical ben- efits .

(a) Description of change .

(i) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting for self-insured liabilities (including

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ignated automatic accounting method change number for a change under section 19.01(1) of this APPENDIX is “42.” See section 6.02(4) of this revenue procedure.

(2) Bonuses .

(a) Description of change .

(i) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting to treat bonuses as incurred in the taxable year in which all 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)). A taxpayer may change its method of accounting under this section 19.01(2) of the APPENDIX provided that:

(A) the terms of the bonus liability have been made available to employees;

(B) the amount of the bonus is calculable as of year end; and

(ii) Inapplicability . This change 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 19.01(2) 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).

(b) Concurrent automatic change . A taxpayer that wants to make both this change and a change to a UNICAP method under section 11.01 or 11.02 of this APPENDIX (as applicable) for the same year of change should file a single Form 3115 for both changes and enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(c) Designated automatic account- ing method change number . The designated automatic accounting method change number for a change under section 19.01(2) of this APPENDIX is “133.” See section 6.02(4) of this revenue procedure.

(3) Vacation pay .

(a) Description of change .

(i) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting to treat vacation pay as incurred in the taxable year in which all 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)). A taxpayer may change its method of accounting under this section 19.01(3) of the APPENDIX provided that:

(A) the vacation pay vests in that taxable year; and

(B) the vacation pay is received by the employee by the 15th day of the 3rd calendar month after the end of that taxable year.

(ii) Inapplicability . This change 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 19.01(3) 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).

(c) Designated automatic account- ing method change number . The designated automatic accounting method change number for a change under section 19.01(3) of this APPENDIX is “134.” See section 6.02(4) of this revenue procedure.

(4) Contact information . For further information regarding a change under this section, contact Sandra Cheston at 202–622–7900 (not a toll-free call).

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

(1) Background . 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.

(2) Description of change .

(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, state income taxes, or state franchise 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, state income taxes, or state franchise taxes under the recurring item exception method 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:

(i) a taxpayer’s liability for a tax subject to the limitation on acceleration of accrual of taxes under § 461(d); or

(ii) 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 19.02 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).

(3) Amounts taken into account . Applicable provisions of the Code, regulations, and other guidance published in the IRB 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

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(B) state unemployment taxes and, in the event the taxpayer is an employer within the meaning of the Railroad Retirement Tax Act (RRTA) ( see § 3231(a)), RRTA 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));

(ii) 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 and wants to change its method of accounting for state unemployment taxes and, in the event the employer is an employer within the meaning of RRTA ( see § 3231(a)), RRTA 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

(iii) an accrual method taxpayer that wants to change its method of accounting for FICA and FUTA taxes to the safe harbor method provided in Rev. Proc. 2008–25, 2008–13 I.R.B. 686. Rev. Proc. 2008–25 provides that for purposes of the recurring item exception, a taxpayer will be treated as satisfying the requirement in § 1.461–5(b)(1)(i) for its payroll tax liability in the same taxable year in which all events have occurred that establish the fact of the related compensation liability and the amount of the related compensation liability can be determined with reasonable accuracy.

(b) Inapplicability . This change does not apply to a taxpayer that is required under § 263A and the regulations thereunder

recovered through cost of goods sold. See § 1.263A–1(e)(3)(ii)(L). A taxpayer may not rely on the provisions of this section 19.02 of the APPENDIX to take a current year deduction.

(4) Concurrent automatic change . A taxpayer that wants to make both this change and a change to a UNICAP method under section 11.01 or 11.02 of this APPENDIX (as applicable) for the same year of change should file a single Form 3115 for both changes and enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.02 of this APPENDIX is “43.” See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact Jamie Kim at 202–622–4950 (not a toll-free call).

.03 Timing of incurring liabilities under a workers’ compensation act, tort, breach of contract, or violation of law .

(1) Description of change .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting for selfinsured 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)(1) and (2).

(b) Inapplicability . This change 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 19.03 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) Amounts taken into account . Applicable provisions of the Code, regulations, and other guidance published in the IRB 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 this section 19.03 of the APPENDIX to take a current year deduction.

(3) Concurrent automatic change . A taxpayer that wants to make both this change and a change to a UNICAP method under section 11.01 or 11.02 of this APPENDIX (as applicable) for the same year of change should file a single Form 3115 for both changes and enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.03 of this APPENDIX is “44.” See section 6.02(4) of this revenue procedure.

(5) Contact information . For further information regarding a change under this section, contact Jamie Kim at 202–622–4950 (not a toll-free call).

.04 Timing of incurring certain liabili- ties for payroll taxes .

(1) Description of change .

(a) Applicability . This change applies to:

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

(A) 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

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to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under this section 19.04 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) Recurring item exception . A taxpayer that previously has not changed to or adopted the recurring item exception for FICA taxes, FUTA taxes, state unemployment taxes, and railroad retirement taxes (if applicable) must change to the recurring item exception method for FICA taxes, FUTA taxes, state unemployment taxes, and railroad retirement taxes (if applicable) as specified in § 461(h)(3) as part of this change.

(3) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to a change described in section 19.04(a)(1)(iii) of this APPENDIX that is made for the taxpayer’s first taxable year ending on or after December 31, 2007.

(4) Amounts taken into account . Applicable provisions of the Code, regulation, and other guidance published in the IRB 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 this section 19.04 of the APPENDIX to take a current year deduction.

(5) Concurrent automatic change . A taxpayer that wants to make both this change and a change to a UNICAP method under section 11.01 or 11.02 of this APPENDIX (as applicable) for the same year of change should file a single Form 3115 for both changes and enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(6) Designated automatic account- ing method change number . The designated automatic accounting method change number for a change under section 19.04(1)(a)(i) or (ii) of this APPENDIX is “45.” The designated automatic account

ing method change number for a change under section 19.04(1)(a)(iii) of this APPENDIX is “113.” See section 6.02(4) of this revenue procedure.

(7) Contact information . For further information regarding a change under this section, contact Jamie Kim at 202–622–4950 (not a toll-free call).

.05 Cooperative advertising .

(1) Description of change . 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) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.05 of this APPENDIX is “46.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Jamie Kim at 202–622–4950 (not a toll-free call).

.06 Timing of incurring certain liabili- ties for services or insurance .

(1) Description of change . This change applies to a taxpayer that is currently treating the mere execution of a contract for services or insurance as establishing the fact of the liability under § 461 and wants to change from that method of accounting for liabilities for services or insurance to comply with Rev. Rul. 2007–3, 2007–4 I.R.B. 350, that is, all the events needed to establish the fact of the liability occur when (a) the event fixing the liability, whether that be the required performance or other event occurs or (b) payment is due, whichever happens earliest.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.06 of this APPENDIX is “106.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Leta Ayres at 202–622–5020 (not a toll-free call).

.07 Rebates and allowances .

(1) Description of change .

(a) Applicability . This change applies to an accrual method taxpayer that wants to change its method of accounting for treating its liability for rebates and allowances to the recurring item exception method under § 461(h)(3) and § 1.461–5.

(b) Inapplicability . This change does not apply to a taxpayer’s liability to pay a refund.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.07 of this APPENDIX is “135.” See section 6.02(4) of this revenue procedure.

(3) Contact information . For further information regarding a change under this section, contact Jamie Kim at 202–622–4950 (not a toll-free call).