SECTION 19. TAXABLE YEAR — Internal Revenue Bulletin 2011-4

DEDUCTION (§ 461)

.01 Timing of incurring liabilities for employee compensation .

(1) Self-insured employee medical benefits .

(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 any amounts not covered by insurance, such as a “deductible” amount under an insurance policy) relating to employee medical expenses (including liabilities resulting from medical services provided to retirees and to employees who have filed claims under a workers’ compensation act) that are not paid from a welfare benefit fund within the meaning of § 419(e) to a method as follows:

(A) If the taxpayer has a liability to pay an employee for medical expenses incurred by the employee, the taxpayer will treat the liability as incurred in the taxable year in which the employee files the claim with the employer. See United States v. General Dynamics Corp., 481 U.S. 239 (1987), 1987–2 C.B. 134.

(B) If the taxpayer has a liability to pay a 3 ^rd party for medical services provided to its employees, the taxpayer will treat the liability as incurred in the taxable year in which the services are provided.

(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(1) 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) 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, direct labor costs must be included in inventory costs and may be recovered through cost of goods sold. See § 1.263A–1(e)(2)(i)(B). A taxpayer may

not rely on the provisions of this section 19.01 of the APPENDIX to take a current year deduction.

(c) 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, in which case the taxpayer must enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(d) Designated automatic account- ing method change number . The designated 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)). Specifically, a taxpayer may change its method of accounting under section 19.01(2) of this APPENDIX to one of the following methods:

(A) If all the events that establish the fact of the liability to pay a bonus have occurred by the end of the taxable year in which the related services are provided and the bonus is received by the employee no later than the 15 ^th day of the 3 ^rd calendar month after the end of the taxable year in which the related services are provided, the taxpayer will treat the bonus liability as incurred in that taxable year. See Rev. Rul. 55–446, 1955–2 C.B. 531, as modified by Rev. Rul. 61–127, 1961–2 C.B. 36.

(B) If all the events that establish the fact of the liability to pay a bonus occur in the taxable year subsequent to the taxable year in which the related services are provided, the taxpayer will treat the bonus liability as incurred in such subsequent 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 section 19.01(2) of this 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, in which case the taxpayer must 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)). Specifically, a taxpayer may change its method of accounting under section 19.01(3) of this APPENDIX to one of the following methods:

(A) If all the events that establish the fact of the liability to pay vacation pay have occurred by the end of the taxable year in which the related services are provided, the taxpayer will treat the vacation pay liability as incurred in that taxable year. A taxpayer may change to this method of accounting only if the vacation pay vests in that taxable year.

(B) If all the events that establish the fact of the liability to pay vacation pay occur in the taxable year subsequent to the taxable year in which the related services are provided, the taxpayer will treat the vacation pay liability as incurred in such subsequent taxable year.

(ii) Inapplicability . This change does not apply:

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(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 that 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). If the taxpayer has self-insured liabilities resulting from medical services provided to employees who have filed claims under a workers compensation act, the taxpayer may change its method of accounting for those liabilities under section 19.01(1) of this APPENDIX.

(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

(A) if the vacation pay is not received by the employee by the 15 ^th day of the 3 ^rd

calendar month after the end of the taxable year in which the related services are provided; or

(B) 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 section 19.01(3) of this 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, in which case the taxpayer must 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(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 franchise 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 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, in which case the taxpayer must enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

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(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) 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) 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 accounting 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.

(6) 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 manufac

(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 change to either a method provided in section 19.01(1) of this APPENDIX for self-insured employee medical expenses or 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, in which case the taxpayer must enter the designated automatic accounting method change numbers for each change 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 liabilities 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

(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, 2008–1 C.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.

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turer’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 liabilities 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, 2007–1 C.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 Charles Kim 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). .08 Ratable accrual of real property taxes .

(1) Description of change . This change applies to an accrual method taxpayer that wants to change its method of accounting for real property taxes to the method described in § 461(c) and § 1.461–1(c)(1) (ratable accrual election). This change applies to real property taxes that relate to a definite period of time. This change does not apply to a taxpayer’s first taxable year in which the taxpayer incurs real property taxes, in which case the change is made using the provisions of § 1.461–1(c)(3)(i).

(2) Manner of making change and designated automatic accounting method change number .

(a) This change is made on a cut-off basis and applies only to real property taxes accrued on or after the beginning of the year of change. Any real property taxes accrued prior to the year of change are accounted for under the taxpayer’s former method of accounting. See § 1.461–1(c)(6), Examples (2) — (5) . See also section 2.06 of this revenue procedure for more information regarding a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(b) In accordance with § 1.446–1(e)(3)(ii), the requirement of § 1.446–1(e)(3)(i) to file an application on Form 3115 is waived and a statement in lieu of the Form 3115 is authorized for this change. The taxpayer’s request (Form 3115 or statement) to make the change under this section of the APPENDIX must include all of the following:

(i) the designated automatic accounting method change number for this change, which is “149”;

(ii) the taxpayer’s name and employer identification number (or social security number in the case of an individual);

(iii) the year of change (both the beginning and ending dates); and

(iv) the information described in § 1.461–1(c)(3)(ii)( a ) through ( f ).

(c) The consent granted under this revenue procedure satisfies the consent required under § 461(c)(2)(B) and § 1.461–1(c)(3)(ii).

(3) Contact information . For further information regarding a change under this section, contact Daniel Cassano at 202–622–7900 (not a toll-free call). .09 California Franchise Taxes . (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for California franchise taxes to a method consistent with the holding in Rev. Rul. 2003–90, 2003–2 C.B. 353. Rev. Rul. 2003–90 provides that for taxable years beginning on or after January 1, 2000, a taxpayer that uses an accrual method of accounting incurs a liability for California franchise tax for federal income tax purposes in the taxable year following the taxable year in which the California franchise tax is incurred under the Cal. Rev. & Tax Code, as amended.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.09 of this APPENDIX is “154.” See section 6.02(4) of this revenue procedure. (3) Contact information . For further information regarding a change under this section, contact Charles Kim at 202–622–5020. .10 Gift cards issued as a refund for returned goods .

(1) Description of change . (a) Applicability . This change applies to an accrual method taxpayer that sells goods at retail and that wants to change its method of accounting for gift cards (as defined by section 4.02 of Rev. Proc. 2011–17, 2011–5 I.R.B.) issued as a refund for returned goods to treat the transaction as (1) the payment of a cash refund in the amount of the gift card, and (2) the sale of a gift card in the amount of the gift card.

(b) Treatment of proceeds of the deemed sale . A taxpayer must treat the proceeds of the deemed sale of a gift card in accordance with the method of accounting it otherwise employs for sales of gift cards.

(2) Scope limitations temporarily inap- plicable . The scope limitations in section 4.02 of this revenue procedure do not apply to the taxpayer’s first or second taxable year ending on or after December 31, 2010. (3) Concurrent automatic change . A taxpayer that wants to make both this change and an automatic change to the deferral method for advance payments under Rev. Proc. 2004–34 ( see section

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voice method. The Applicable Discount is equal to the difference between the beginning inventory value under the gross invoice method and the net invoice method.

Example . Taxpayer’s accounts payable balance at the beginning of the year of change was $1,000 under the gross invoice method and $980 under the net invoice method. Taxpayer’s inventory value was $3,000 under the gross invoice method and $2,955 under the net invoice method. The Available Discount is $20 ($1,000 - $980) and the Applicable Discount is $45 ($3,000 $2,955). Thus, Taxpayer’s net § 481(a) adjustment is a negative $25 ($20 - $45). (3) Computation of § 481(a) adjustment for changes to gross invoice method . In the case of a taxpayer changing from the net invoice method to the gross invoice method, a positive adjustment is required to prevent omissions arising from the fact that the net invoice method did not report income upon timely payment for some or all of the goods that remain in inventory, and a negative adjustment is required to prevent duplications arising from the fact that the net invoice method included the invoice price, adjusted for the cash discounts, of some or all goods in cost of goods sold and the discount will be earned by payment in a subsequent taxable year. The net § 481(a) adjustment can be computed by deducting the “Available Discount” at the beginning of the year of change from the “Applicable Discount” at the beginning of the year of change. The Available Discount is equal to the difference between the accounts payable balance under the gross invoice method and the net invoice method. The Applicable Discount is equal to the difference between the beginning inventory value under the gross invoice method and the net invoice method.

Example . Taxpayer’s accounts payable balance at the beginning of the year of change was $980 under the net invoice method and $1,000 under the gross invoice method. Taxpayer’s inventory value was $2,955 under the net invoice method and $3,000 under the gross invoice method. The Applicable Discount is $45 ($3,000

$2,955) and the Available Discount is $20 ($1,000 - $980). Thus, Taxpayer’s net § 481(a) adjustment is a positive $25 ($45 - $20). (4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.01 of this APPENDIX is “48.” See section 6.02(4) of this revenue procedure. (5) Contact information . For further information regarding a change un

15.07 of this APPENDIX) for the same taxable year of change must 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) Concurrent non-automatic change . A taxpayer that wants to make both this change and change to a permissible method of accounting under § 1.451–5 for the same taxable year of change must request this change in method of accounting using the non-automatic procedures in Rev. Proc. 97–27 (or any successor).

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 19.10 of this APPENDIX is “156.” See section 6.02(4) of this revenue procedure. (6) Contact information . For further information regarding a change under this section, contact Sean M. Dwyer at 202–622–5020 (not a toll-free call).