When the automatic change procedure of Rev. Proc. 94-49 applies.

• Author: Connor, James E.
• Position: Uniform capitalization rules

Rev. Proc. 94-49 offers most companies a one-time opportunity to make modifications to their Sec. 263A uniform capitalization rules (UCR) methodologies without the advance consent of the IRS National Office.

This important opportunity is available for the first tax year beginning in 1994. The general deadline for using it is the filing date of the 1994 tax return. However, companies under examination have an earlier deadline - in many cases, as early as Dec. 27, 1994.

This important opportunity allows most companies to - correct erroneous UCR methods with audit protection for prior tax years, and/or - improve their allocation methodologies to simplify their UCR calculation or achieve more favorable tax results.

The following examples illustrate situations in which the automatic change procedure of Rev. Proc. 94-49 applies.

Example 1: XYZ Company, a calendar-year taxpayer, is treating certain handling costs relating to raw materials as period costs. XYZ is not under IRS examination.

Handling costs are subject to the capitalization rules. Thus, XYZ is using an erroneous UCR method. The company should request a change in accounting method under the automatic change provision of Rev. Proc. 94-49. This filing will give XYZ a maximum four-tax year spread of the resulting adjustment, and audit protection for its earlier years.

Example 2: A Company is recording its inventory gross of discounts and recognizing discount income currently when discounts are earned.

Trade and other discounts are required by Regs. Sec. 1.471-3(b) to be accounted for as a reduction to the purchase price of goods. Interest-type discounts (e.g., 2/10, net 30) can be accounted for as a reduction to the purchase price of goods; alternatively, purchases are recorded at their gross purchase price with discounts recognized currently in income when they are taken.

It is unclear whether the Service will allow taxpayers to use the automatic method change procedure of Rev. Proc. 94-49 for trade, interest or other discounts, since it can be argued that this is not a pure Sec. 263A change.

Note that if a company uses either the simplified resale or the simplified production method to allocate UCR costs to ending inventory, it may not use the automatic change procedure to change its definition of "Sec. 471 costs" to record purchases at their net value.

If a change is made, the beginning inventory for the year of change is reduced to its net purchase price. When a company is on LIFO...