SEC. 5. — Internal Revenue Bulletin

.01 Consent. In accordance with § 1.446–1(e)(3)(ii), the requirement to file an application on Form 3115 within the 180-day period is waived for any application for change in method of accounting filed pursuant to this revenue procedure. In addition, under § 1.446–1(e)(2)(i), the consent of the Commissioner is hereby granted to any taxpayer within the scope of this revenue procedure to change its method of accounting for costs subject to § 263A. This consent is conditioned, however, on the taxpayer filing a current Form 3115 in the manner described in section 5.02 of this revenue procedure and otherwise complying with the provisions of this revenue procedure.

.02 Filing procedure. A taxpayer changing a method of accounting pur

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suant to this revenue procedure must complete and file a current Form 3115 in duplicate. The original must be attached to the taxpayer’s timely filed (including extensions) original federal income tax return for the year of change. For taxable years beginning in 1994, however, a taxpayer can attach the Form 3115 to an amended return filed on or before October 15, 1995. In all cases a copy of the Form 3115 must be filed with the National Office and addressed to the Commissioner of Internal Revenue, Attention: Office of Assistant Chief Counsel (Income Tax and Accounting) CC:DOM:IT&A, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044, no later than when the original of the Form 3115 is filed with the federal income tax return for the year of change. No user fee is required for a Form 3115 filed under this section 5.02, and a Form 3115 filed under this section 5.02 will not be acknowledged.

.03 Section 481(a) adjustment. The § 481(a) adjustment generally must be taken into account in computing taxable income in the manner provided in section 5.04 of this revenue procedure. A change in method of accounting under this revenue procedure is treated as a voluntary change in method of accounting that is initiate by the taxpayer, and, therefore, the § 481(a) adjustment is not restricted to post-1953 items.

.04 Section 481(a) adjustment period. Beginning with the year of change, a taxpayer changing its method of accounting for costs pursuant to this revenue procedure generally must take any applicable § 481(a) adjustment into account ratably over the same number of taxable years, not to exceed four, that the taxpayer used its former method of accounting. See sections 5.05 and 5.09 of this revenue procedure for exceptions to this general rule.

.05 De minimis rule. If the § 481(a) adjustment is less than $25,000, the taxpayer may elect to take the adjustment into account in the year of change instead of over the adjustment period otherwise prescribed by section 5.04 of this revenue procedure. A taxpayer that makes this election must attach to its original Form 3115 a statement indicating that it is electing the de minimis rule pursuant to section 5.05 of this revenue procedure.

.06 Application of § 1.263A–7T(e). Section 1.263A–7T(e) provides procedures that a taxpayer must use to

revalue the items or costs included in its inventory for the first taxable year it is subject to § 263A. The following provisions of § 1.263A–7T(e) apply to a change in method of accounting made pursuant to this revenue procedure for a taxpayer described in section 4.01(2), 4.01(3), or 4.01(4) of this revenue procedure:

(1) Section 1.263A–7T(e)(1), which provides the general rule that a taxpayer must revalue the items or costs included in its beginning inventory and also requires a taxpayer filing a consolidated federal income tax return to revalue deferred gains or losses resulting from deferred intercompany transactions;

(2) Section 1.263A–7T(e)(6), which provides procedures for a taxpayer to use in revaluing its inventory, including a facts and circumstances revaluation method, a weighted average revaluation method for a taxpayer using either the first-in, first-out (FIFO) or the specific goods LIFO inventory metod, and a 3-year average revaluation method for a taxpayer using the dollar-value LIFO method (see section 5.07 of this revenue procedure for rules regarding the establishment of a new base year);

(3) Sections 1.263A–7T(e)(7), (8), and (9), which provide the procedures that a taxpayer using either the weighted average revaluation method or the 3-year average revaluation method may use to make adjustments to its inventory costs from prior years to prevent the capitalization of costs not incurred in earlier years; and

(4) Sections 1.263A–7T(e)(11)(iii) and (iv), which provide the definition of a change in method of accounting required to be made under § 263A, and the ordering rules when there are changes in methods of accounting other than those required by § 263A.

.07 New base year. The following rules apply only to a taxpayer using the dollar-value LIFO inventory method.

(1) Taxpayers described in sec- tions 4.01(1) and 4.01(3) of this revenue procedure. A taxpayer described in section 4.01(1) (a small reseller changing from the UNICAP method to a non-UNICAP method) or section 4.01(3) (a reseller-producer changing from a UNICAP method to a simplified resale method) of this revenue procedure that is not currently using a simplified method for capitalizing the additional § 263A costs must

restate its base year costs and LIFO carrying values by subtracting from each inventory layer the amount of additional § 263A costs in that layer. The taxpayer, however, may not change its base year.

(2) Taxpayers described in sec- tions 4.01(2) and 4.01(4) of this revenue procedure.

(a) In general. A taxpayer described in section 4.01(2) (a formerly small reseller changing from a nonUNICAP method to the UNICAP method) or section 4.01(4) (a resellerproducer changing from a simplified resale method to a UNICAP method) of this revenue procedure changing to a non-simplified method for capitalizing additional § 263A costs must restate its base year costs and LIFO carrying values by adding to each inventory layer the amount of additional § 263A costs applicable to that layer, as provided in § 1.263A–7T(e)(6).

(b) Base years. A taxpayer described in section 5.07(2)(a) of this revenue procedure generally may not change its base year. However, if the taxpayer uses the 3-year average method under § 1.263A–7T(e)(6)(iv), the taxpayer must treat the year immediately preceding the year of change as its new base year.

.08 Applicability of Notice 88–23. Consistent with the principle of Notice 88–23, 1988–1 C.B. 490, a taxpayer changing its method of accounting under this revenue procedure, and also desiring to discontinue its use of the LIFO method of accounting for inventories in the same taxable year, may choose to change from the LIFO method before it makes the change in method of accounting pursuant to this revenue procedure.

.09 Applicability of Rev. Proc. 92– 20. Except as otherwise provided in this revenue procedure, the following definitions and provisions of Rev. Proc. 92–20 apply to a change in method of accounting made pursuant to this revenue procedure:

(1) sections 3.01 through 3.04, which provide definitions for the following terms: ‘‘taxpayer,’’ ‘‘year of change,’’ and ‘‘filed’’;

(2) section 8.01(2), which modifies the adjustment period if 90 percent or more of the § 481(a) adjustment is attributable to the taxable year immediately preceding the year of change;

(3) section 8.01(4), which generally requires cooperatives to take the

entire § 481(a) adjustment into account in the year of change;

(4) section 8.02, which provides that a short taxable year is treated as a separate taxable year; and

(5) section 8.03, which provides situaitons where the § 481(a) adjustment period that is computed under section 5.04 of this revenue procedure will be accelerated.

.10 Additional procedural require- ments.

(1) Agreement to terms. In addition to providing all the information required on the Form 3115, a taxpayer must attach to the Form 3115 a written statement providing that it agrees to all the terms and conditions of this revneue procedure.

(2) Label. In order to assist in the processing of changes in method of accounting under this revenue procedure, reference to this revenue procedure must be made a part of the Form 3115 either by typing or legibly printing the following statement at the top of page 1 of each Form 3115: ‘‘FILED UNDER REV. PROC. 95–33.’’

(3) Signature. The Form 3115 and the statement described in section 5.10(1) of this revenue procedure must be signed by or on behalf of the taxpayer requesting the change by an individual with the authority to bind the taxpayer in such matters. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a partnership, a trustee on behalf of a trust, or an individual on behalf of a sole proprietorship. See the signature requirements in the General Instructions for Form 3115. If the taxpayer is a member of a consolidated group, a Form 3115 submitted on behalf of the taxpayer must also be signed by a duly authorized officer of the common parent. See § 1.1502–77.

(4) Authorized representative. If an agent is authorized to represent a taxpayer before the Service, to receive the original or a copy of correspondence concerning the request, or to perform any other act(s) regarding the Form 3115 on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to the Form 3115. A taxpayer’s representative without a power of attorney to represent the taxpayer will not be given any information regarding the Form 3115.

.11 No protection from examination changes. A taxpayer that receives consent to change its method of accounting

under this revenue procedure does not thereby obtain protection from examination changes for taxable years prior to the taxable year for which the change is made.

.12 Example. The following example illustrates the principles of this revenue procedure for small resellers and formerly small resellers.

Assume Corp X, a reseller of personal property incorporated January 2, 1989, adopted a taxable year ending December 31. Corp X determines that its average annual gross receipts for the three taxable years (or fewer, if applicable) immediately preceding taxable years 1989 through 1998 are as shown in the table below:

1989 $ 0 1990 5,000,000 1991 6,000,000 1992 7,000,000 1993 11,000,000 1994 11,000,000 1995 9,000,000 1996 8,000,000 1997 11,000,000 1998 12,000,000

Furthermore, Corp X, which adopted the dollar-value LIFO inventory method, has the following LIFO inventory balances determined without considering the effects of the UNICAP method:

Beginning Ending

1993 $1,000,000 $1,100,000 1994 1,100,000 1,200,000 1995 1,200,000 1,300,000 1996 1,300,000 1,400,000 1997 1,400,000 1,500,000 1998 1,500,000 1,600,000

Corp X was required by § 263A to change to the UNICAP method for 1993 because its average annual gross receipts for the three taxable years immediately preceding 1993 were $11,000,000, which exceeded the $10,000,000 ceiling permitted by the small reseller exception. Assume that Corp X was required to capitalize $80,000 of ‘‘additional § 263A costs’’ to the cost of its 1993 beginning inventory because of this change in inventory method. In addition, Corp X was required to determine the appropriate adjustment period for the corresponding positive § 481(a) adjustment. Because Corp X used its former inventory method for four taxable years immediately preceding 1993 (that is, 1989, 1990, 1991, and 1992), Corp 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 1993. Thus, Corp X was required to include a $20,000 positive § 481(a) adjustment in its 1993 taxable income.

Corp X elected to use the simplified resale method under § 1.263A–1T(d)(3) for determining the amount of additional § 263A costs to be capitalized to each LIFO layer. Assume that Corp X was required to add $10,000 of

1995–2 C.B. 383

Current Taxable

Year

AVERAGE Annual Gross Receipts for the Three Taxable Years Immediately Preceding the

Current Taxable Year

additional § 263A costs to the cost of its 1993 ending inventory because of the $100,000 increment for 1993.

Corp X’s 1993 Ending Inventory:

is, 1995 and 1996), Corp X must include one-half of the § 481(a) adjustment when computing taxable income for each of the two taxable years beginning with 1997. Thus, Corp X must include a $60,000 positive § 481(a) adjustment in its 1997 taxable income. Assume that Corp X must add $10,000 of additional § 263A costs to the cost of its 1997 ending inventory because of the $100,000 increment for 1997.

Corp X’s 1997 Ending Inventory:

Beginning Inventory

(Without UNICAP costs) $1,000,000 1993 Increment 100,000 Additional § 263A Costs on

Beginning Inventory 80,000 Additional § 263A Costs on

1995 Increment 100,000 1995 § 481(a) Adjustment �Negative� �100,000� Total 1995 Ending

Inventory $1,300,000

Corp X’s Unamortized 1993 § 481(a) Adjustment:

Unamortized 1993 § 481(a)

1993 Increment 10,000 Total 1993 Ending Inventory $ ~~1,190,000~~

Adjustment—12/31/94 $40,000 Amount Included in 1995

Taxable Income �20,000� Unamortized 1993 § 481(a)

Adjustment—12/31/95 $20,000

(Without UNICAP costs) $1,400,000 1997 Increment 100,000 Additional § 263A costs on

Beginning Inventory 120,000 Additional § 263A costs on

Beginning Inventory

Corp X’s Unamortized 1993 § 481(a) Adjustment: 1993 § 481(a) Adjustment $80,000 Amount Included in 1993

Taxable Income �20,000� Unamortized 1993 § 481(a)

Corp X’s Unamortized 1995 § 481(a) Adjustment: 1995 § 481(a) Adjustment �Negative� �100,000� Amount Included in 1995

1997 Increment 10,000 Total 1997 Ending

$60,000 Adjustment—12/31/93

Inventory $1,630,000

Because Corp X failed to satisfy the small reseller exception for 1994, Corp X was required to continue using the UNICAP method for its inventory costs. Furthermore, Corp X was required to include $20,000 of the unamortized 1993 §481(a) adjustment in 1994 taxable income. Assume that Corp X was required to add $10,000 of additional § 263A costs to the cost of its 1994 ending inventory because of the $100,000 increment for 1994.

Corp X’s 1994 Ending Inventory:

Corp X also satisfies the small reseller exception for 1996 and, therefore, is not required to return to the UNICAP method for 1996. Corp X, however, must include $20,000 of the unamortized 1993 § 481(a) adjustment and $50,000 of the unamortized 1995 § 481(a) adjustment in 1996 taxable income.

Corp X’s 1996 Ending Inventory:

Taxable Income 50,000 Unamortized 1993 § 481(a)

Adjustment—12/31/95 $� 50,000�

Corp X’s Unamortized 1997 § 481(a) Adjustment:

1997 § 481(a) Adjustment $120,000 Amount Included in 1997

Taxable Income - 60,000� Unamortized 1997 § 481(a)

Adjustment—12/31/97 $ 60,000

Beginning Inventory

(With UNICAP costs) $1,190,000 1994 Increment 100,000 Additional § 263A Costs on

Beginning Inventory

Inventory $1,400,000

1994 Increment 10,000 Total 1994 Ending Inventory $1,300,000

(Without UNICAP costs) $1,300,000 1996 Increment 100,000 Total 1996 Ending

Because Corp X fails to satisfy the small reseller exception for 1998, Corp X must continue using the UNICAP method for its inventory costs. Furthermore, Corp X is required to include $60,000 of the unamortized 1997 § 481(a) adjustment in 1998 taxable income. Assume that Corp X is required to add $10,000 of additional § 263A costs to the cost of its 1998 ending inventory because of the $100,000 increment for 1998.

Corp X’s 1998 Ending Inventory:

Copr X’s Unamortized 1993 § 481(a) Adjustment:

Corp X’s Unamortized 1993 § 481(a) Adjustment:

Unamortized 1993 § 481(a)

Beginning Inventory

Adjustment—12/31/93 $60,000 Amount Included in 1994

Adjustment—12/31/95 $20,000 Amount Included in 1996

(With UNICAP costs) $1,630,000 1998 Increment 100,000 Additional § 263A Costs on

1998 Increment 10,000 Total 1998 Ending

Taxable Income �20,000� Unamortized 1993 § 481(a)

Adjustment—12/31/96 $ 0

Adjustment—12/31/94 $40,000

Inventory $1,740,000

Because Corp X satisfies the small reseller exception for 1995, Corp X may change voluntarily from the UNICAP method to a permissible non-UNICAP inventory capitalization method under this revenue procedure. To reflect the removal of the additional § 263A costs from the cost of its 1995 beginning inventory, Corp X must compute a corresponding § 481(a) adjustment, which is negative $100,000 ($1,200,000 – $1,300,000). Because Corp X used the UNICAP method for only two years (that is, 1993 and 1994), Corp X must include one-half of the § 481(a) adjustment when computing taxable income for each of the two taxable years beginning with 1995. Thus, Corp X must include a $50,000 negative § 481(a) adjustment in 1995 taxable income. In addition, Corp X must include $20,000 of the unamortized 1993 § 481(a) adjustment in 1995 taxable income.

Corp X’s 1995 Ending Inventory:

Beginning Inventory

(With UNICAP costs) $1,300,000

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Corp X’s Unamortized 1995 § 481(a) Adjustment:

Unamortized 1995 § 481(a) $�50,000� Adjustment—12/31/95 Amount Included in 1996

Corp X’s Unamortized 1997 § 481(a) Adjustment:

Unamortized 1997 § 481(a)

Taxable Income 50,000 Unamortized 1995 § 481(a)

Adjustment—12/31/96 $ 0

Adjustment—12/31/97 $60,000 Amount Included in 1998

In 1997, Corp X fails to satisfy the small reseller exception and, therefore, must return to the UNICAP method as provided under this revenue procedure. Corp X changes to the simplified resale method without a historic absorption ratio election under § 1.263A–3(d)(3). Assume that Corp X must capitalize $120,000 of additional § 263A costs to the cost of its 1997 beginning inventory because of this change in inventory method. In addition, Corp X must determine the appropriate adjustment period for the corresponding positive § 481(a) adjustment. Because Corp X used its former inventory method for two taxable years before 1997 (that