SECTION 3. TRADE OR BUSINESS

EXPENSES (§ 162)

.01 Advances made by a lawyer on behalf of clients .

(1) Description of change . This change applies to a lawyer handling cases on a contingent fee basis that advances money to pay for costs of litigation or for other expenses on behalf of clients and that wants to change the method of accounting for such advances from treating them as deductible business expenses to treating them as loans. See Boccardo v. United States, 12 Cl. Ct. 184 (1987); Canelo v.

Commissioner, 53 T.C. 217 (1969), aff’d per curiam, 447 F.2d 484 (9 ^th Cir. 1971).

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 3.01 of this APPENDIX is “2.” See section 6.02(4) of this revenue procedure. (3) Contact information . For further information regarding a change under this section, contact Martin Osborne at 202–622–7900 (not a toll-free call). .02 ISO 9000 costs . (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for costs incurred to obtain, maintain and renew ISO 9000 certification to conform with Rev. Rul. 2000–4, 2000–1 C.B. 331. (2) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to this change.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 3.02 of this APPENDIX is “3.” See section 6.02(4) of this revenue procedure. (4) Contact information . For further information regarding a change under this section, contact Martin Osborne at 202–622–7900 (not a toll-free call). .03 Restaurant or tavern smallwares packages .

(1) Description of change . This change applies to a taxpayer engaged in the trade or business of operating a restaurant or tavern (within the meaning of section 4.01 of Rev. Proc. 2002–12, 2002–1 C.B. 374) that wants to change its method of accounting for the costs of smallwares to the smallwares method described in Rev. Proc. 2002–12.

(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 changing its method of accounting for restaurant smallwares under this section 3.03 of the APPENDIX must take the entire § 481(a) adjustment into account in computing taxable income in the year of change.

(4) Designated automatic accounting method change number . The designated automatic accounting method change

2011–4 I.R.B. 358 January 24, 2011

under its proposed method of determining the deductibility of repair and maintenance costs, together with a description of the legal authority supporting the taxpayer’s proposed unit(s) of property for determining the deductibility of repair and maintenance costs;

(d) The following statements regarding the costs to which this change applies:

(i) “The taxpayer represents that the repair and maintenance costs are incurred to keep the taxpayer’s property in ordinarily efficient operating condition.”

(ii) “The taxpayer represents that the repair and maintenance costs do not materially increase the value or substantially prolong the useful life of any unit of property compared to the value or useful life of the property before the general wear or tear or particular event that led to the repairs or maintenance.”

(iii) “The taxpayer represents that the repair and maintenance costs do not adapt any unit of property to a new or different use.”

(iv) “The taxpayer represents that the repair and maintenance costs do not include costs to replace any unit of property or any major components or substantial structural parts of any unit of property.”

(v) “The taxpayer represents that the repair and maintenance costs are not incurred as part of a plan of rehabilitation, modernization, or improvement to any unit of property.”

(vi) “The taxpayer represents that the repair and maintenance costs do not result from any prior owner’s use of any unit of property.”

(3) Additional copy of Form 3115 re- quired . A taxpayer changing its method of accounting under section 3.06 of this APPENDIX must, in addition to the timely duplicate filing requirements in section 6.02(3) of this revenue procedure, send a copy of its completed Form 3115 (including attachments) to the following address no earlier than the first day of the year of change and no later than the date the taxpayer files the original Form 3115 with its federal income tax return for the year of change, in accordance with section 6.02(3) of this revenue procedure: Internal Revenue Service, 1973 North Rulon White Blvd., Mail Stop 4917, Ogden, UT 84404.

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

count. For example, for a taxpayer with inventories, certain indirect material costs must be included in inventory costs and may be recovered through the cost of goods sold. See § 1.263A–1(e)(3)(ii)(E). A taxpayer may not rely on the provisions of section 3.05 of this APPENDIX to take a current 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, 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.

(4) Proposed regulations . The Department of the Treasury has published proposed regulations that address the definition and treatment of materials and supplies under § 162. See Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property, REG–168745–03, 73 FR 12838–01 (March 10, 2008), 2008–18 I.R.B. 871. The proposed regulations are not effective until publication of a Treasury decision adopting them as final regulations in the Federal Register. Thus, taxpayers may not change a method of accounting in reliance upon the rules contained in the proposed regulations until the rules are published as final regulations in the Federal Register. If final regulations are adopted with positions that are inconsistent with the method of accounting implemented by the taxpayer under section 3.05 of this APPENDIX, that method will no longer be regarded as proper. In such event, the taxpayer will be required to follow any instructions in the final regulations or other guidance published in the IRB concerning methods of accounting for materials and supplies for future taxable years.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change in method of accounting under section 3.05 of this APPENDIX is “143.” See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact Justin G. Meeks at 202–622–5020 (not a toll-free call).

.06 Repair and maintenance costs . (1) Description of change . (a) Applicability . This change applies to a taxpayer that wants to change its method of accounting from capitalizing under § 263(a) costs paid or incurred to repair and maintain tangible property (including network assets) to treating the repair and maintenance costs as ordinary and necessary business expenses under § 162 and § 1.162–4. This change also applies to a taxpayer that wants to change the unit of property it uses to determine the deductibility of repair and maintenance costs to a unit of property that is permissible under applicable legal authority.

(b) Inapplicability . This change does not apply to:

(i) 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 3.06 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); (ii) A taxpayer that wants to change its method of accounting for dispositions of depreciable property, including a change in the unit of property used for such dispositions (but see sections 6.24 and 6.25 of this APPENDIX); or

(iii) Any property subject to the repair allowance under § 1.167(a)–11(d)(2) (including expenditures incurred after December 31, 1980, for the repair, maintenance, rehabilitation, or improvement of property placed in service before January 1, 1981).

(2) Manner of making change . A taxpayer making this change must attach to its Form 3115 a statement with the following:

(a) A detailed description of the types of tangible property to which this change applies;

(b) A detailed description of the types of repair and maintenance costs to which this change applies;

(c) If the taxpayer is changing any unit of property determination, a detailed description of the unit(s) of property under its present method of accounting for determining the deductibility of repair and maintenance costs and a detailed description of the unit(s) of property it will use

January 24, 2011 359 2011–4 I.R.B.

procedures to make a § 171(c) election to amortize bond premium.

(2) Revocation of election . The revocation of a § 171(c) election applies to all taxable bonds that are held by the taxpayer on the first day of the first taxable year for which the revocation is effective (year of change), and to all taxable bonds that are subsequently acquired by the taxpayer.

(3) Manner of making change . This change is made using a cut-off basis and applies only to taxable bonds held on or after the beginning of the year of change. See 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.

Under the cut-off basis, for taxable bonds held at the beginning of the year of change, the taxpayer may not amortize any remaining bond premium on the bonds. Because the cut-off basis is prescribed for this change, the basis of any bond, adjusted for amounts previously amortized during the period of the election, is not affected by the revocation.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 5.01 of this APPENDIX is “16.” See section 6.02(4) of this revenue procedure. (5) Additional requirements . On a statement attached to the Form 3115, the taxpayer must provide:

(a) the reason(s) for revoking the election; and

(b) a description of the method by which, and the date on which, the taxpayer made the § 171(c) election that is proposed to be revoked.

(6) Audit protection . A taxpayer receives audit protection under section 7 of this revenue procedure in connection with this change. However, the audit protection applicable to this change does not preclude the Commissioner from examining the method used by the taxpayer to determine the amount of amortizable bond premium under § 171(b) for a taxable year prior to the year of change.

(7) Contact information . For further information regarding a change under this section, contact William E. Blanchard at 202–622–3950 (not a toll-free call).

.02 Reserved .

IRB prescribe the manner in which a liability that has been incurred is taken into account. For example, for a taxpayer with inventories, certain repair and maintenance costs must be included in inventory costs and may be recovered through the cost of goods sold. See § 1.263A–1(e)(3)(ii)(E). A taxpayer may not rely on the provisions of section 3.06 of this APPENDIX to take a current deduction.

(5) No ruling on unit of property . The consent granted under this revenue procedure for this change is not a determination by the Commissioner that the taxpayer is using the appropriate unit of property in determining the deductibility of repair and maintenance costs and does not create any presumption that the proposed unit of property is permissible. The director will ascertain whether the taxpayer’s determination of its unit of property is correct.

(6) 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.

(7) Proposed regulations . The Department of the Treasury has published proposed regulations that address the application of §§ 162 and 263 to expenditures paid or incurred to repair, maintain, or improve tangible property. See Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property, 73 FR 12838–01 (March 10, 2008), 2008–18 I.R.B. 871. The proposed regulations are not effective until publication of a Treasury decision adopting them as final regulations in the Federal Register. Thus, taxpayers may not change a method of accounting in reliance upon the rules contained in the proposed regulations until the rules are published as final regulations in the Federal Register. If final regulations are adopted with positions that are inconsistent with the method of accounting implemented by the taxpayer under section 3.06 of this APPENDIX, that method will no longer be regarded as proper. In such event, the taxpayer will be required to follow any instructions in the final regulations or other guidance published in

the IRB concerning methods of accounting for the repair, maintenance, or improvement of tangible property for future taxable years.

(8) Designated automatic accounting method change number . The designated automatic accounting method change number for a change in method of accounting under section 3.06 of this APPENDIX is “144.” See section 6.02(4) of this revenue procedure.

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