SECTION 11. UNIFORM — Internal Revenue Bulletin 2011-4

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;

(vi) a reseller or reseller-producer that wants to change to a UNICAP method (or methods) specifically described in the regulations and includes any necessary changes in the identification of costs subject to § 263A that will be accounted for using the new method 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; or

(vii) a reseller or reseller-producer that wants to change from not capitalizing a cost subject to § 263A to capitalizing that cost, if the reseller or reseller-producer is otherwise already using a UNICAP method (or methods) specifically described in the regulations.

(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 absorption 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 absorption 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 limitation of § 4.02(7) of this revenue procedure does not apply to the changes described in §§ 11.01(1)(a)(i) and (ii) of the APPENDIX of this revenue procedure.

(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).

January 24, 2011 383 2011–4 I.R.B.

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

taxable years, not to exceed four, that the taxpayer used its former method of accounting. A taxpayer changing its method of accounting for costs pursuant to sections 11.01(1)(a)(ii), 11.01(1)(a)(v) or 11.01(1)(a)(vi) of this APPENDIX generally must take any applicable net positive § 481(a) adjustment for such change into account ratably over four taxable years. See section 5.04(3) of this revenue procedure for exceptions to this general rule.

(4) Multiple changes . A taxpayer that wants to make both this change and an

other change in method of accounting for the same year of change must comply with the ordering rules of § 1.263A–7(b)(2).

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

AVERAGE Annual Gross

Current Receipts for the Three Taxable Taxable Years Immediately Preceding the Year Current Taxable Year

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 inventory bal- ances 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

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 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)

2011–4 I.R.B. 384 January 24, 2011

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

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

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

X ’s 2006 Ending Inventory:

thermore, 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

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

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.

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

X ’s 2007 Ending Inventory:

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

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 2008 and, therefore, is not required to return to the UNICAP

method for 2008. X, however, must include $20,000 of the unamortized 2005

positive § 481(a) adjustment in its 2008 taxable income.

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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:

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.

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

X ’s 2009 Ending Inventory:

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

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

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

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

X ’s 2010 Ending Inventory:

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

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

tion 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, including any necessary changes

(7) Contact information . For further information regarding a change under this section, contact Alexander R. Roche or Kari Fisher, at 202–622–4970 (not a tollfree 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 sec

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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 Alexander R. Roche or Kari Fisher, at 202–622–4970 (not a tollfree 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 environmental 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).

in the identification of costs subject to § 263A that will be accounted for using the new method. This change also includes a change from not capitalizing a cost subject to § 263A to capitalizing that cost for a producer or a reseller-producer that is otherwise already using a UNICAP method (or methods) specifically described in the regulations. However, this change 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 . 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 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). 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 (§ 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 Alexander R. Roche or Kari Fisher, at 202–622–4970 (not a tollfree call).

.03 Change to no longer capitalize research and experimental expenditures under § 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. 2011–14 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

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scribed in section 5.01 of Rev. Proc. 2010–44 is “150.” The designated automatic accounting method change number for a change to be treated as a reseller without production activities as described in section 5.02 of Rev. Proc. 2010–44 is “151.”

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