rp-06-11.pdf

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# Part III

## Administrative, Procedural, and Miscellaneous

26 CFR 1.263A-1T: Uniform capitalization of costs (temporary).
(Also Part I, §§ 446(e); 1.263A-2T, 1.446-1)

## Rev. Proc. 2006-11

# SECTION 1. PURPOSE

This revenue procedure provides procedures by which a taxpayer changing its
method of accounting to comply with § 1.263A-1T or 1.263A-2T of the Income Tax
Regulations as set forth in T.D. 9217 (70 FR 44467) for its first taxable year ending on
or after August 2, 2005, may request the consent of the Commissioner utilizing either
the advance consent procedures of Rev. Proc. 97-27, 1997-1 C.B. 680 (as modified and
amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, and amplified and clarified by Rev.
Proc. 2002-54, 2002-2 C.B. 432) or the automatic consent procedures of Rev. Proc.
2002-9, 2002-1 C.B. 327 (as modified and clarified by Announcement 2002-17, 2002-1
C.B. 561, modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 432, and
amplified, clarified and modified by Rev. Proc. 2002-54, 2002-2 C.B. 432).

# SECTION 2. BACKGROUND

.01 Under §§ 446(e) and 1.446-1(e), a taxpayer generally must secure the
consent of the Commissioner before changing a method of accounting for federal
income tax purposes. To obtain the Commissioner's consent to a change in method,
§ 1.446-1(e)(3)(i) generally requires a taxpayer to file Form 3115, Application for
Change in Accounting Method, during the taxable year in which the taxpayer desires to
make the proposed change. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to
prescribe administrative procedures that provide the terms and conditions necessary for
a taxpayer to obtain consent to change a method of accounting. The terms and
conditions the Commissioner may prescribe include whether the change is to be made
with a § 481(a) adjustment, and if so, the § 481(a) adjustment period, or on a cut-off
basis.

.02 Section 481(c) and §§ 1.446-1(e)(3)(ii) and 1.481-4 provide that the
adjustment required by § 481(a) may be taken into account in determining taxable
income in the manner and subject to the conditions agreed to by the Commissioner and
the taxpayer.

.03 This revenue procedure applies only for a taxpayer's first taxable year
ending on or after August 2, 2005, for a change in method of accounting to comply with
§ 1.263A-1T or 1.263A-2T. A change in method of accounting under this revenue
procedure requires a § 481(a) adjustment, and the § 481(a) adjustment period is two
taxable years for a net positive adjustment. It is expected that this two-year adjustment
period for a net positive § 481(a) adjustment will apply to changes in methods of

accounting made in future years to comply with the rules in §§ 1.263A-1T and 1.263A-
2T, and the successor final regulations.

.04 Rev. Proc. 97-27 provides the general procedures under §§ 446(e) and
1.446-1(e) for obtaining the consent of the Commissioner to change a method of
accounting for federal income tax purposes. Except as specifically provided in section
4.02 of Rev. Proc. 97-27 or other published guidance, Rev. Proc. 97-27 applies to all
taxpayers requesting the Commissioner's consent to change a method of accounting for
federal income tax purposes. See Rev. Proc. 97-27, sections 1.01 and 4.01.

.05 Section 4.02(1) of Rev. Proc. 97-27 provides that Rev. Proc. 97-27 does not
apply if the change in method of accounting is required to be made pursuant to a
published automatic change procedure.

.06 Rev. Proc. 2002-9 provides procedures under §§ 446(e) and 1.446-1(e) for
obtaining the automatic consent of the Commissioner to change certain methods of
accounting for federal income tax purposes. Specifically, Rev. Proc. 2002-9 applies to a
taxpayer requesting the Commissioner's consent to change to a method of accounting
described in the APPENDIX of such revenue procedure. Rev. Proc. 2002-9 is the
exclusive procedure for a taxpayer within its scope to obtain the Commissioner's
consent. See Rev. Proc. 2002-9, sections 1 and 4.01.

.07 T.D. 9217 contains final and temporary regulations relating to the
capitalization of costs under the simplified service cost method provided by § 1.263A-
1(h) and the simplified production method provided by § 1.263A-2(b). Specifically, the
regulations under § 1.263A-1T and § 1.263A-2T clarify what property qualifies as self-

constructed assets produced on a routine and repetitive basis for purposes of the
simplified service cost method or the simplified production method, respectively.

.08 Section 1.263A-1T(k)(1) provides that a change in a taxpayer's treatment of
mixed service costs to comply with § 1.263A-1T is a change in method of accounting to
which the provisions of §§ 446 and 481 and the regulations thereunder apply. Section
1.263A-1T(k)(1) further provides that for a taxpayer's first taxable year ending on or
after August 2, 2005, the taxpayer is granted the consent of the Commissioner to
change its method of accounting to comply with § 1.263A-1T, provided the taxpayer
follows the administrative procedures issued under § 1.446-1(e)(3)(ii), as modified by
§ 1.263A-1T(k)(2) through (4), for obtaining the Commissioner's automatic consent to a
change in accounting method.

.09 Section 1.263A-2T(e)(1) provides that a change in a taxpayer's treatment of
additional § 263A costs to comply with § 1.263A-2T is a change in method of
accounting to which the provisions of §§ 446 and 481 and the regulations thereunder
apply. Section 1.263A-2T(e)(1) further provides that for a taxpayer's first taxable year
ending on or after August 2, 2005, the taxpayer is granted the consent of the
Commissioner to change its method of accounting to comply with § 1.263A-2T, provided
the taxpayer follows the administrative procedures issued under § 1.446-1(e)(3)(ii), as
modified by § 1.263A-2T(e)(2) through (4), for obtaining the Commissioner's automatic
consent to a change in accounting method.

.10 Pursuant to the foregoing provisions, a taxpayer changing its method of
accounting to comply with § 1.263A-1T or 1.263A-2T as set forth in T.D. 9217 for its first

taxable year ending on or after August 2, 2005, is required to use the automatic consent
procedures of Rev. Proc. 2002-9 (as modified by § 1.263A-1T(k) or 1.263A-2T(e),
whichever is applicable) to obtain the consent of the Commissioner to change its
method of accounting. Some taxpayers contemplating such accounting method
changes are uncertain whether their proposed methods of accounting will comply with
the regulations under § 263A, and have requested that the Internal Revenue Service
allow for advance review of their requested accounting methods.

.11 The Service has determined that it is in the best interest of sound tax
administration to allow taxpayers changing their methods of accounting to comply with
§ 1.263A-1T or 1.263A-2T for their first taxable years ending on or after August 2, 2005,
to utilize either the advance consent procedures of Rev. Proc. 97-27 or the automatic
consent procedures of Rev. Proc. 2002-9. Therefore, when §§ 1.263A-1T and 1.263A-
2T are issued as final regulations, the final regulations will allow taxpayers to use the
advance consent procedures for their first taxable year ending on or after August 2,
2005. This revenue procedure is being issued in advance of the final regulations and
the rules provided herein are consistent with the rules that will be provided in the final
regulations.

## SECTION 3. SCOPE

This revenue procedure applies to any taxpayer seeking to change its method of
accounting for mixed service costs to comply with § 1.263A-1T for its first taxable year
ending on or after August 2, 2005, and to any taxpayer seeking to change its method of
accounting for additional § 263A costs to comply with § 1.263A-2T for its first taxable

year ending on or after August 2, 2005.

## SECTION 4. APPLICATION

.01 The provisions of section 4.02(1) of Rev. Proc. 97-27 and section 4.01 of
Rev. Proc. 2002-9 that preclude a taxpayer from requesting the Commissioner's
advance consent to change a method of accounting that is required to be made
pursuant to a published automatic change procedure shall not apply to changes in
method of accounting to comply with § 1.263A-1T or 1.263A-2T for a taxpayer's first
taxable year ending on or after August 2, 2005. Accordingly, a taxpayer within the
scope of this revenue procedure may utilize either the advance consent procedures of
Rev. Proc. 97-27 or the automatic consent procedures of Rev. Proc. 2002-9 to obtain
the consent of the Commissioner to make such changes.

.02 The following provisions shall apply to a taxpayer within the scope of this
revenue procedure that requests the consent of the Commissioner under Rev. Proc. 97-
27 to change its method of accounting to comply with § 1.263A-1T or 1.263A-2T for its
first taxable year ending on or after August 2, 2005:

(1) Notwithstanding the provisions of § 1.446-1(e)(3)(i) and section 5.01(1)(a)
of Rev. Proc. 97-27, a taxpayer may submit a Form 3115 on or before January 31,
2006, or the date that is 30 days after the end of the taxpayer's taxable year for which
the change is requested, whichever is later;

(2) The provisions of section 4.02 of Rev. Proc. 97-27 that otherwise would
prevent certain taxpayers under examination, before appeals or before a federal court
from requesting the Commissioner's advance consent to change a method of

accounting shall not apply;

(3) A taxpayer that changes its method of accounting for mixed service costs
to comply with § 1.263A-1T will not receive audit protection under section 9 of Rev.
Proc. 97-27 if its method of accounting for mixed service costs is an issue under
consideration (as defined in section 3.08 of Rev. Proc. 97-27) at the time the Form 3115
is filed with the National Office;

(4) A taxpayer that changes its method of accounting for additional § 263A
costs to comply with § 1.263A-2T will not receive audit protection under section 9 of
Rev. Proc. 97-27 if its method of accounting for additional § 263A costs is an issue
under consideration (as defined in section 3.08 of Rev. Proc. 97-27) at the time the
Form 3115 is filed with the National Office; and

(5) The change in method of accounting requires a § 481(a) adjustment. The
§ 481(a) adjustment period is two taxable years for a net positive adjustment.

SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 97-27 and Rev. Proc. 2002-9 are modified.

# SECTION 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Grant D. Anderson of the Office
of Associate Chief Counsel (Income Tax & Accounting). For further information
regarding this revenue procedure contact Scott Rabinowitz at (202) 622-4970 (not a toll
free call).

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