IRS eases change to simplified UNICAP rules .

• Author: Ochsenschlager, Thomas P.
• Position: Capitalizing costs into inventory

Rev. Procs. 2002-9 and 2002-54 greatly improve taxpayers' ability to adopt the simplified method for capitalizing costs into inventory (UNICAP). Significantly, the procedures can be used by taxpayers previously not in compliance with the Sec. 263A UNICAP rules, and by taxpayers seeking to make an automatic change.

The latter point is noteworthy: unless a change in accounting method qualifies under the automatic-change procedures, the IRS must consent to it, even if the change is to correct an erroneous method.

The automatic-change procedures have several advantages over the nonautomatic procedures. They allow a taxpayer to file an automatic change by the extended due date of the return for the change year (otherwise, the taxpayer would have to request the change within the tax year for which it is sought). Thus, for example, a taxpayer could make a change for a calendar 2002 tax year under the automatic-change procedures, but not under the IRS-consent procedure.

A taxpayer filing under the automatic-change procedures does not have to wait for IRS approval before filing its return or preparing its income tax provision. Moreover, it pays no user fee for automatically filing a change under the new procedures. To make a change, the taxpayer completes Form 3115, Application for Change in Accounting Method, and attaches a copy to its timely filed Federal return for the change year. It must file a second copy of Form 3115 with the IRS National Office on or before the date it filed the return. The Service has not revised the Form 3115 instructions to reflect these revenue procedures.

Rev. Proc. 2002-9 expands the automatic-change procedure to include certain changes in accounting method under Sec. 263A. According to Appendix Section 4.02(1), it applies to "a producer of real or tangible personal property described in 1.263A-2 that wants to change to a UNICAP method (or methods) specifically described in the regulations." The procedure was modified by Rev. Proc. 2002-54, which states, under Section 6.03, that the above Appendix also applies to a reseller-producer. Thus, if a taxpayer...