SEC. 7. INQUIRIES

.02 ‘‘Additional § 263A costs’’ are the indirect costs, other than interest, that must be capitalized under § 263A, but that were not capitalized under the taxpayer’s method of accounting immediately prior to the effective date of § 263A.

.03 Sections 1.263A–2(b) and 1.263A–3(d) provide a simplified production method and a simplified resale method, respectively, for determining the additional § 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) inentory method) or other property on hand at the end of the year. Under these simplified methods, a taxpayer determines the additional § 263A costs that must be capitalized by multiplying § 471 costs (as defined in § 1.263A–1(d)(2)) remaining on hand at year end (or reflected in the current-year increment in the case of a taxpayer using the LIFO inventory method) by an absorption ratio. In general, the absorption ratio is total additional § 263A costs incurred during the taxable year, divided by total § 471 costs incurred during the taxable year.

.04 Section 1.263A–2(b)(2) provides that a taxpayer electing to use a simplified production method for any trade or business generally must use a simplified production method for all production and resale activities. Section 1.263A–3(a)(4)(ii) provides, however, that a reseller-producer otherwise permitted to use a simplified resale method may use a simplified resale method if its production activities are considered de minimis under § 1.263A– 3(a)(2)(iii) and are incident to its resale of personal property described in § 1221(1). In addition, § 1.263A– 3(a)(4)(iii) provides that a resellerproducer otherwise permitted to use a simplified resale method may use a simplified resale method for personal property produced for it under a contract with an unrelated person if the taxpayer enters into the contract incident to its resale activities and the property is sold to its customers.

.05 Sections 263A(b)(2)(B) and 1.263A–3(b)(1) provide that the UNICAP method does not apply to any personal property acquired for resale during any taxable year if the taxpayer’s average annual gross receipts for the three previous taxable years do not exceed $10 million. Section 1.263A–3(a)(3) provides that a small

reseller is not required to capitalize additional § 263A costs associated with any personal property acquired for resale, including personal property produced for the taxpayer under a contract with an unrelated person if the taxpayer enters into the contract incident to its resale activities and the property is sold to its customers. In addition, § 1.263A– 3(a)(2)(ii) provides that a small reseller is not required to capitalize additional § 263A costs associated with any personal property that the taxpayer produces incident to its resale activities if the production activities are considered de minimis under § 1.263A–3(a)(2)(iii).

.06 Section 1.263A–7T(e)(11)(i) of the temporary Income Tax Regulations (formerly § 1.263A–1T(e)(11)(i)) provides that a taxpayer who is required to change its method of accounting under § 263A may change automatically under the provisions of § 1.263A–7T(e)(11). The regulation further provides, however, that the Commissioner may prescribe additional procedures, at the time and in the manner that the Commissioner may determine, for a taxpayer seeking to change its method of accounting under § 1.263A–7T(e)(11).

.07 Sections 446(e) and 1.446–1(e)(2)(i) state that, except as otherwise expressly provided, a taxpayer must obtain the consent of the Commissioner to change a method of accounting for federal income tax purposes.

.08 Section 1.446–1(e)(3)(i) requires that in order to obtain this consent, a Form 3115, Application for Change in Accounting Method, generally must be filed within 180 days after the beginning of the taxable year in which the proposed change is to be made.

.09 Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change its method of accounting in accordance with § 446(e).

.10 Section 481(a) requires that those adjustments necessary to prevent amounts from being duplicated or omitted must be taken into account when the taxpayer’s taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year.

.11 Sections 481(c) and 1.481–5 provide that the adjustments required by

§ 481(a) must be taken into account in determining taxable income in the manner and subject to the conditions agreed to by the Commissioner and the taxpayer.

.12 Rev. Proc. 92–20, 1992–1 C.B. 685, provides the general procedures under § 1.446–1(e) for obtaining the consent of the Commissioner to change a method of accounting for federal income tax purposes. Section 2.04 of Rev. Proc. 92–20 provides that, unless other published guidance provides terms and conditions that must be used in making a specific type of accounting method change, a change in method of accounting will be made pursuant to the terms and conditions provided in Rev. Proc. 92–20.

.13 Rev. Proc. 94–49, 1994–2 C.B. 705, provides an automatic consent procedure for a taxpayer changing its method of accounting under §§ 1.263A–1, 1.263A–2, and 1.263A–3 for its first taxable year beginning on or after January 1, 1994. However, section 3.02(4) of Rev. Proc. 94–49 expressly excludes from the scope of its automatic consent procedures any changes in method of accounting for a taxpayer that subsequently qualifies as a small reseller or that subsequently ceases to qualify as a small reseller.