SECTION 2. BACKGROUND

.01 Concurrently with the release of this revenue procedure, the Department of Treasury (Treasury Department) and the Internal Revenue Service (Service) are issuing final regulations amending §§ 1.263A–1, -2, and -3 (T.D. 9843) (the final regulations). The final regulations are intended to reduce distortions, compliance costs, burden, and administrative complexity under § 263A of the Internal Revenue Code (Code) by (1) providing rules for the treatment of negative adjustments related to certain costs required to be capitalized to property produced or acquired for resale; (2) providing a new simplified method of accounting, the modified simplified production method, for determining the additional section 263A costs that must be capitalized to ending inventory or other property on hand at the end of the year; and (3) redefining how certain types of costs are categorized for purposes of the simplified methods for determining the additional section 263A costs that must be capitalized to ending inventory or other property on hand at the end of the year.

.02 Sections 1.263A–2(b), 1.263A–2(c), and 1.263A–3(d) provide the simplified production method, the modified simplified production method, and the simplified resale method, respectively, which are the simplified methods for determining the additional section 263A costs that must be capitalized to ending inventory (or to the current-year increment in the case of a taxpayer using the last-in, first-out (LIFO) inventory method) or other property on hand at the end of the year. Under the simplified production method and the simplified resale method, a taxpayer determines the additional section 263A costs (as defined in § 1.263A–1(d)(3)) that must be capitalized to ending inventory or other property on hand at the end of the year by multiplying the section 471 costs (as defined in § 1.263A–1(d)(2)) remaining on hand at year end (or reflected in the currentyear increment in the case of a taxpayer using the LIFO inventory method) by an absorption ratio. In general, these absorption

ratios are total additional section 263A costs incurred during the taxable year divided by total section 471 costs incurred during the taxable year. Under the modified simplified production method, a taxpayer determines the additional section 263A costs that must be capitalized to ending inventory or other property on hand at the end of the year by adding the results of (1) the pre-production section 471 costs remaining on hand at year end multiplied by a pre-production absorption ratio, and (2) the production section 471 costs remaining on hand at year end multiplied by a production absorption ratio.

.03 Sections 1.263A–2(b)(4), 1.263A– 2(c)(4), and 1.263A–3(d)(4) permit a taxpayer changing to or using the simplified production method, the modified simplified production method, or the simplified resale method, respectively, to elect to use a historic absorption ratio in lieu of an actual absorption ratio. However, a taxpayer may make a historic absorption ratio election only if it has used the simplified production method, the modified simplified production method, or the simplified resale method for each of the three preceding taxable years.

.04 Sections 1.263A–2(b)(4)(v)(B) and 1.263A–3(d)(4)(v)(B) provide transition rules for a taxpayer that has elected to use the simplified production method with a historic absorption ratio election or the simplified resale method with a historic absorption ratio election, respectively, to revoke its historic absorption ratio election in its first, second, or third taxable year ending on or after November 20, 2018, under such terms and conditions as may be prescribed by the Commissioner.

.05 Except as otherwise expressly provided by the Code or the regulations thereunder, § 446(e) and § 1.446–1(e)(2) require a taxpayer to secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the terms and conditions necessary for a taxpayer to obtain consent to a change in method of accounting. Revenue Procedure 2015–13, 2015–5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015–33, 2015–24 I.R.B. 1067, as modified by Rev. Proc. 2016–1, 2016–1 I.R.B. 1, and as modified by Rev. Proc. 2017–59,

2017–48 I.R.B. 543, provides the general procedures by which a taxpayer may obtain automatic consent of the Commissioner to a change in method of accounting described in Rev. Proc. 2018–31.

.06 Section 12.01 of Rev. Proc. 2018–31 provides certain automatic changes for a reseller or reseller-producer, such as a change to a “UNICAP method specifically described in the regulations.” See section 12.01(3)(g) of Rev. Proc. 2018–31. .07 Section 12.02 of Rev. Proc. 2018–31 provides certain automatic changes for a producer or reseller-producer, such as a change to a “UNICAP method specifically described in the regulations.” See section 12.02(2) of Rev. Proc. 2018–31. .08 This revenue procedure modifies Rev. Proc. 2018–31 to provide additional automatic method changes under § 1.263A–1, -2, and -3 to assist taxpayers in complying with the final regulations. For example, sections 12.01 and 12.02 of Rev. Proc. 2018–31 are modified to expand the methods of accounting that are included in the list of UNICAP methods specifically described in the regulations and to temporarily permit automatic changes in methods of accounting for certain taxpayers changing from a simplified method with a historic absorption ratio election to a different simplified method without a historic absorption ratio election, a specific identification method, a burden rate method, or a standard cost method. In addition, Rev. Proc. 2018–31 is modified to add new section 12.17, which provides an automatic change in method of accounting for taxpayers using a simplified method or changing to a simplified method to recharacterize costs in accordance with the characterization requirements of § 1.263A–1(d)(2) and (d)(3), and a new section 12.18, which temporarily permits taxpayers to make an automatic change in method of accounting to revoke a taxpayer’s historic absorption ratio election.