SECTION 4. CHANGES IN — Internal Revenue Bulletin 2014-22

METHOD OF ACCOUNTING

.01 Rev. Proc. 2011–14 is modified to add new section 11.11 of the APPENDIX, to read as follows:

. 11 Sales-Based Royalties

(1) Description of change. This change applies to a taxpayer that wants to change its method of accounting for sales-based royalties (as described in § 1.263A– 1(e)(3)(ii)(U)( 2 )) that are properly allocable to inventory property:

(a) From not capitalizing sales-based royalties to capitalizing these costs and allocating them entirely to cost of goods sold under a taxpayer’s method of accounting;

(b) From not capitalizing sales-based royalties to capitalizing these costs and allocating them to inventory property under a taxpayer’s method of accounting;

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tory property to allocating them entirely to cost of goods sold; or

(d) From capitalizing sales-based royalties and allocating these costs entirely to cost of goods sold to allocating them to inventory property.

(2) Limitations. (a) A taxpayer may not make a change in method of accounting under this section 11.11 of the APPENDIX if the taxpayer wants to change to capitalizing salesbased royalties and allocating them to inventory property using an other reasonable allocation method within the meaning of § 1.263A–1(f)(4).

(b) A taxpayer making the changes described in section 11.11(1)(a) or 11.11(1)(c) of the APPENDIX that uses a simplified method to determine the additional § 263A costs allocable to inventory property on hand at year end must remove sales-based royalties allocated to cost of goods sold from the formulas used to allocate additional § 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.

(c) A taxpayer making a change in method of accounting under this section 11.11 of the APPENDIX that uses a simplified method with an historic absorption ratio election (see §§ 1.263A–2(b)(4) and 1.263A–3(d)(4)) and currently includes, or is changing its method to include, salesbased royalties in any part of its historic absorption ratio must revise its previous and current historic absorption ratios. To revise its historic absorption ratios, the taxpayer must apply its proposed method of accounting during the test period, during all recomputation years, and during all updated test periods to determine the § 471 costs and additional § 263A costs that were incurred. The revised historic absorption ratios must be used to revalue beginning inventory and must be accounted for in the taxpayer’s § 481(a) adjustment. The taxpayer must use a method described in § 1.263A–7(c) to revalue beginning inventory.

(4) Concurrent automatic changes . A taxpayer that wants to make a change under this section 11.11 of the APPENDIX and one or more automatic changes in method of accounting under § 263A for the same year of change may file a single Form 3115 for all changes, provided the taxpayer enters the designated automatic change numbers for all changes on the appropriate line on the Form 3115 and complies with the ordering rules of § 1.263A–7(b)(2).

(5) Ogden copy of Form 3115 required in lieu of national office copy . A taxpayer changing its method of accounting under this section 11.11 of the APPENDIX must file a signed copy of its completed Form 3115 with the IRS in Ogden, UT in lieu of filing the national office copy 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. A taxpayer that makes both this change and a concurrent automatic change under § 263A on a single Form 3115 for the same year of change must file a signed copy of the completed Form 3115 with the IRS in Ogden, UT in lieu of filing the national office copy 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. See sections 6.02(3)(a)(ii)(B) (providing the general rules) and 6.02(7)(b) (providing the mailing address) of this revenue procedure.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for changes in method of accounting under section 11.11 of the APPENDIX is No. 201.

(7) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free call).

.02 Rev. Proc. 2011–14 is modified to add new section 11.12 of the APPENDIX, to read as follows:

.12 Treatment of Sales-Based Vendor Chargebacks under a Simplified Method

(1) Description of change. This change applies to a taxpayer that wants to change its method of accounting to no longer include cost adjustments for sales-based vendor chargebacks described in § 1.471–

3(e)(1) in the formulas used to allocate additional § 263A costs to ending inventory under a simplified method.

(2) Limitations . (a) A taxpayer making this change that uses a simplified method to determine the additional § 263A costs allocable to inventory property on hand at year end must remove sales-based vendor chargebacks from the formulas used to allocate additional § 263A costs to ending inventory in the same manner that the taxpayer included these amounts in the formulas.

(b) A taxpayer making a change in method of accounting under this section 11.12 of the APPENDIX that uses a simplified method with an historic absorption ratio election (see §§ 1.263A–2(b)(4) and 1.263A–3(d)(4)) and currently includes sales-based vendor chargebacks in any part of its historic absorption ratio must revise its previous and current historic absorption ratio(s). To revise its historic absorption ratios, the taxpayer must apply its proposed method of accounting during the test period, during all recomputation years, and during all updated test periods to determine the § 471 costs and additional § 263A costs that were incurred. The revised historic absorption ratios must be used to revalue beginning inventory and must be accounted for in the taxpayer’s § 481(a) adjustment. The taxpayer must use a method described in § 1.263A–7(c) to revalue beginning inventory.

(3) Certain scope limitations tempo- rarily inapplicable . The scope limitations in section 4.02(1) through (4) and (7) of this revenue procedure do not apply to this change for a taxpayer’s first and second taxable years ending on or after January 13, 2014. (4) Concurrent automatic changes . A taxpayer that wants to make both this change and one or more automatic changes in method of accounting under § 263A, or both this change and the change described in section 21.15 of the APPENDIX for the same taxable year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic change numbers for all changes on the appropriate line on the Form 3115 and complies with the ordering rules of § 1.263A– 7(b)(2).

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(5) Ogden copy of Form 3115 required in lieu of national office copy . A taxpayer changing its method of accounting under this section 11.12 of the APPENDIX must file a signed copy of its completed Form 3115 with the IRS in Ogden, UT in lieu of filing the national office copy 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. If a taxpayer makes both this change and a concurrent automatic change under § 263A or both this change and the change described in section 21.15 of the APPENDIX on a single Form 3115 for the same year of change, then the taxpayer must file a signed copy of that completed Form 3115 with the IRS in Ogden, UT in lieu of filing the national office copy 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. See sections 6.02(3)(a)(ii)(B) (providing the general rules) and 6.02(7)(b) (providing the mailing address) of this revenue procedure.

(7) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free call).

.03 Rev. Proc. 2011–14 is modified to add new section 21.15 of the APPENDIX, to read as follows:

.15 Sales-Based Vendor Chargebacks (1) Description of change. This change applies to a taxpayer that wants to change its method of accounting to treat salesbased vendor chargebacks as a reduction in cost of goods sold in accordance with § 1.471–3(e)(1).

(2) Certain scope limitations tempo- rarily inapplicable. The scope limitations in section 4.02(1) through (4) and (7) of this revenue procedure do not apply to this change for a taxpayer’s first and second taxable years ending on or after January 13, 2014.

(3) Concurrent automatic changes . A taxpayer that wants to make both this change and the change described in section 11.12 of the APPENDIX for the same taxable 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 the Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2).

(4) Ogden copy of Form 3115 required in lieu of national office copy . A taxpayer changing its method of accounting under this section 21.15 of the APPENDIX must file a signed copy of its completed Form 3115 with the IRS in Ogden, UT in lieu of filing the national office copy 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. If a taxpayer makes both this change and a concurrent automatic change described in section 11.12 of the APPENDIX on a single Form 3115 for the same year of change, then the taxpayer must file a signed copy of that completed Form 3115 with the IRS in Ogden, UT in lieu of filing the national office copy 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. See sections 6.02(3)(a)(ii)(B) (providing the general rules) and 6.02(7)(b) (providing the mailing address) of this revenue procedure.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for changes in methods of accounting under section 21.15 of the APPENDIX is 203. See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact John Roman Faron at (202) 317-7005 (not a toll-free call).