SECTION 2. BACKGROUND

.01 Sections 263A(a) and 1.263A–1(a)(3)(i) of the Income Tax Regulations require a taxpayer subject to § 263A to include in inventory costs direct costs and indirect costs properly allocable to the taxpayer’s produced and acquired inventory property.

.02 Section 1.263A–3(c)(1) requires a taxpayer that acquires property for resale (reseller) to capitalize the acquisition cost of, and the indirect costs that are properly allocable to, property acquired for resale. The indirect costs most often incurred by resellers are purchasing, handling, and storage costs. However, a reseller is not required to capitalize handling

Changes in Accounting Method

.06 Section 446(e) of the Code states that, except as otherwise provided, a taxpayer that changes a method of accounting on the basis of which it regularly computes income in keeping its books must secure consent before computing taxable income under a new method. Section 1.446–1(e)(3)(i) of the Income Tax Regulations requires that, except as provided under the authority of § 1.446–1(e)(3)(ii), to secure the Commissioner’s consent to change its method of accounting, a taxpayer must file a Form 3115, Application for Change in Accounting Method, during the taxable year in which the taxpayer desires to make the proposed change.

.07 Rev. Proc. 97–27, 1997–1 C.B. 680, as amplified and modified by Rev. Proc. 2002–19, 2002–1 C.B. 696, as amplified and clarified by Rev. Proc. 2002–54, 2002–2 C.B. 432, as modified by Rev. Proc. 2007–67, 2007–2 C.B. 1072, and as clarified and modified by Rev. Proc. 2009–39, 2009–2 C.B. 371, provides the general procedures for obtaining the advance consent of the Commissioner to change a method of accounting. See also Rev. Proc. 2010–1, 2010–1 I.R.B. 1 (or any successor) .

.08 The application of § 833 in a taxable year followed by nonapplication of that provision in the subsequent taxable year (or vice versa ) may result in one or more changes in accounting method. For example, accounting for 100 percent of unearned premiums under § 833(a)(3) in one year, but only 80 percent of unearned premiums under § 832(b)(4) in the next year, is a change in method of accounting. Likewise, the loss (or recovery) of insurance company status may implicate a number of changes in methods of accounting because some methods of accounting are available only to insurance companies under Subchapter L. The special deduction allowed under § 833(a)(2) and § 833(b) is not, however, a method of accounting.

.09 A taxpayer that is required to change one or more methods of accounting by reason of the application or nonapplication of § 833 must secure consent for these changes under the advance consent procedures of Rev. Proc. 97–27. These accounting method changes are not within the scope of Rev. Proc. 2008–52, 2008–2

C.B. 587, as amplified, clarified, and mod- ified by Rev. Proc. 2009–39.