Uniform Capitalization Rules: Special Topics; Method Change Rules, written by James E. Connor, Esq., James E. Martin, CPA, of PricewaterhouseCoopers LLP, and Dwight Mersereau, Esq., Of Counsel to Miller & Chevalier, Chartered, analyzes the accounting method changes involving the Uniform Capitalization Rules and the application of the Uniform Capitalization Rules in the international context and in various specific industries, such as farming, publication, and natural resources.

The 1986 Tax Reform Act overhauled these costing rules, essentially creating a uniform set of rules. Costs related to a particular category of produced or acquired property must be associated with that property and deducted either when the property is sold or through depreciation deductions.

This Portfolio discusses §263A (Capitalization and Inclusion in Inventory Costs of Certain Expenses), examines the rules for changes in accounting methods, and details the provisions of those rules.

The Worksheets include IRS pronouncements and related materials, including method change documents and checklists. To aid in researching a particular matter, a Bibliography is provided.

Uniform Capitalization Rules: Special Topics; Method Change Rules allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios 

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which cover every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

Detailed Analysis

I. UCR Accounting Method Change Rules

A. General Discussion of UCR Accounting Method Changes

1. In General

2. Determining Whether Method Change Is Subject to “UCR Method Change” Rules

a. In General

b. Non-UCR Inventory Method Changes

c. Changing from Capitalizing Research and Experimental Expenditures under § 263A

3. UCR Method Changes Made in Same Tax Year as Other Method Changes

B. UCR Method Change Rules for Inventory

1. General Discussion

2. UCR Method Changes that May Qualify as Automatic Accounting Method Changes

a. In General

b. Automatic UCR Changes for Resellers

c. Automatic UCR Method Changes for Producers and Resellers-Producers

d. Additional Requirements of Automatic UCR Method Changes

3. Procedures for Filing Automatic Accounting Method Changes

4. UCR Method Changes that Must Be Made under Non-Automatic Method Change Procedures

5. Non-Automatic Method Change Procedural Rules

6. Section 481(a) Adjustment

a. In General

b. How the § 481(a) Adjustment Is Computed

(1) In General

(2) Methods of Revaluing Prior Year's Ending Inventory

(a) Facts and Circumstances Revaluation

(b) Rules for Revaluing FIFO Ending Inventory

(c) Rules for Revaluing LIFO Ending Inventory

(i) LIFO Theory

(ii) Revaluing Specific Goods LIFO Inventory

(iii) Dollar-Value LIFO

(A) Updating Base Year

(B) Illustration of Three-Year Average Method

(C) Subsequent Year Computations

(D) Adjustments to Revaluation Factor

(E) Significant Considerations in Deciding Whether to Adopt Three-Year Average Method

(3) Computing the Section 481(a) Adjustment When Changing Costs Included in a Simplified Method Absorption Ratio

(4) Other Necessary Adjustments in Computing the § 481(a) Adjustment

(a) Deferred Intercompany Transactions

(b) Pre-1954 Adjustments

c. Adjustment Period

(1) In General

(2) Election to Include De Minimis Section 481(a) Adjustment in Income Entirely in the Year of Change

(3) Miscellaneous-Treatment of § 481(a) Adjustments by Flow-Through Entities

(4) Subsequent Conditions that May Shorten the Adjustment Period

d. Estimated Taxes

C. Automatic Method Change Rules Applicable to Certain Wholesalers/Retailers

1. In General

2. Section 481(a) Adjustment

a. How the § 481(a) Adjustment Is Computed

b. Adjustment Period

(1) General Discussion of Adjustment Period

(2) Miscellaneous

(3) Subsequent Conditions that May Shorten Adjustment Period

(4) Updating LIFO Base Year

c. Estimated Taxes

D. Changes to or from Historical Absorption Ratio Method

1. Adoption and Use

2. Revocation of Election

E. Method Change Rules Applicable During 1987–2002 Tax Years

F. Method Change Rules Relating to Self-Constructed Assets

1. General Discussion

2. Summary of Procedural Requirements

3. Section 481(a) Adjustment

a. How the § 481(a) Adjustment Is Computed

b. Adjustment Period

(1) In General

(2) Election to Include De Minimis § 481(a) Adjustment in Income Entirely in Year of Change

(3) Miscellaneous - Treatment of § 481(a) Adjustments by Flow-Through Entities

(4) Subsequent Conditions that May Shorten Adjustment Period

c. Estimated Taxes

II. Provisions Affecting Specific Industries; International Operations

A. In General

B. Farming Businesses

1. Application of Uniform Capitalization Rules (UCR) to Farming

2. Definition of “Farming Business”

3. Application of UCR to Plants

a. In General

b. Preproductive Period for Plants

c. Costs Required to Be Capitalized in Connection with Production of Plants

4. Application of Rules to Animals

a. In General

b. Costs Required to Be Capitalized in Connection with Production of Animals

5. Election to Expense Production Costs

6. Costs Resulting from Certain Casualties Affecting Plants

7. Inventory Valuation Methods

8. Accounting Method Changes

C. Effect on Multinational Taxpayers’ Operations

1. Foreign Tax Credit

2. Impact of UCR on Related Foreign Corporations

3. Property Imported from Related Parties

D. Authors and Publishers

1. General Rules

2. Exemption for Authors, Photographers, and Artists

E. Natural Resource Related Issues

1. Oil and Gas

2. Hard Minerals

3. Timber

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Form 3115 (Application for Change in Accounting Method) Automatic Accounting Method Change Under Rev. Proc. 2002-9 for Manufacturer

Worksheet 2 Form 3115 (Application for Change in Accounting Method) Non-Automatic Method Change Under Rev. Proc. 97-27

Worksheet 3 Form 3115 (Application for Change in Accounting Method) Accounting Method Change Under Rev. Proc. 2002-9 for Retailer/Wholesaler Whose Gross Receipts Exceed $10,000,000

Worksheet 4 Preamble to Regs. § 1.263A-4, T.D. 8897, 65 Fed. Reg. 50638 (8/21/2000)

Worksheet 5 Notice 2003-36 - Request for Comments Regarding Eligible Property for Purposes of Qualification for Use of Simplified Service Cost and Simplified Production Methods; Interim Procedures for Accounting Method Change Applications

Worksheet 6 Notice 2003-59 - Automatic Change to Simplified Service Cost Method or to Simplified Production Method for Self-Constructed Assets for Last Tax Year Ending On or Before May 8, 2003

Worksheet 7 Sample Letter to IRS Requesting Consent for Filing Form 3115 for Taxpayer Under Examination

Bibliography

OFFICIAL

Statutes:

Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

Tax Services:

Periodicals:

1987

1988

1989

1996

1997

1999

2000

2001

2002

2003

2004