Could forgetting to include the effect of UNICAP put accounting method changes at risk?

• Author: Van Leuven, Mary
• Position: Uniform capitalization

Taxpayers making automatic accounting method changes that affect capitalizable costs should consider the uniform capitalization rules of Sec. 263A and the related regulations (UNICAP rules). This item discusses how failing to consider the UNICAP rules might cause the IRS to reject the accounting method change.

Background

On January 10, 2011, the IRS issued revised procedures for automatic accounting method changes. Rev. Proc. 2011-14 supersedes the prior guidance for automatic method changes in Rev. Proc. 2008-52 (as modified by Rev. Proc. 2009-39) and also modifies the advance consent method change procedures in Rev. Proc. 97-27 to conform certain procedural requirements. In general, Rev. Proc. 2011-14 is effective for automatic accounting method changes filed on or after January 10, 2011, for a year of change ending on or after April 30, 2010. Certain transition rules may apply to convert or amend previously filed applications, la the majority of cases, a Sec. 481(a) adjustment is imposed to prevent the duplication or omission of an item of income or deduction, and this adjustment reflects the cumulative impact of the proposed method versus the current method as of the end of the tax year immediately preceding the year of change (see Section 5.03 of Rev. Proc. 2011-14).

One provision in Rev. Proc. 2011-14 that taxpayers should consider is Section 2.05(1), which provides in relevant part that "[i]n computing the net [section]481(a) adjustment, a taxpayer must take into account all relevant accounts." This language is not new but is of recent vintage; it was first included in Rev. Proc. 2009-39, which modified the comparable portion of Rev. Proc. 2008-52, which in turn was the predecessor to Rev. Proc. 2011-14. While the change was subtle and may simply memorialize otherwise applicable principles, taxpayers may not have fully grasped its effect. Although portions of the automatic procedures specifically require that the taxpayer must already properly capitalize the cost at issue or otherwise file a concurrent change (see, e.g., Section 6.01(l)(c)(ii) of the appendix to Rev. Proc. 2011-14, concerning certain changes in method of accounting for depreciation), the language in Section 2.05(1) ostensibly applies to all method changes.

The UNICAP Rules and Accounting Method Changes

Why does this issue merit attention? Interpretations of Section 2.05(1)'s implications are currently evolving and could have a significant effect on a taxpayer's tax...