The uniform capitalization rules are effective for costs incurred after December 31, 1986, or, in the case of inventories, for taxable years beginning after December 31, 1986. Taxpayers that are required by Sec. 263A to change their method of accounting may make this change in accordance with Reg. Sec. 1.263A-IT(e). As provided in Rev. Proc. 84- 74, the Commissioner imposes terms and conditions when consenting to changes in methods of accounting. These terms and conditions make certain that taxable income is or will be clearly reflected, and prevent taxpayers from receiving otherwise unavailable benefits that could arise in a change in method of accounting.

A taxpayer who fails to comply with the provisions of Sec. 263A and the accompanying regulations must secure the consent of the Commissioner before changing to an acceptable method of accounting.

Securing the Commissioner's

Consent

Reg. Sec. 1.446-1(e)(3)(i) provides that, in order to secure the Commissioner's consent to a change of a taxpayer's method of accounting, the taxpayer must file an application on Form 3115, Application for Change in Accounting Method, with the Commissioner, Washington, D.C., within 180 days after the beginning of the taxable year in which the proposed change is to be made.

Sec. 481(a) requires that those adjustments necessary to prevent amounts from being duplicated or omitted be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding taxable year. As stated in Rev. Proc. 84-74, in order to further compliance with proper methods of (tax) accounting, an adjustment period of more tha 1 year is not appropriate, if taxable income is increased (positive adjustment).

If such adjustment is positive, it must be taken into account in the year of change. The following limitations also apply to such change in method of accounting:

1. No part of any (consolidated or separate) net operating loss carryover available at the beginning of the year of change may be used as an offset against the positive Sec. 481(a) adjustment taken into account in the year of change. The net operating loss caryover available at the beginning of the year of change may be offset only against income (other than Sec. 481(a) adjustment) generated in the year of change. The positive Sec. 481(a) adjustment attributable to the year of change may be offset against any net operating loss otherwise incurred in the year of change as well as against any future net operating loss carryback under Sec. 172(b).

2. No part of any (consolidated or separate) credit carryover available at the beginning of the year of change many be used to reduce the federal income tax liability resulting from, or attributable to, the inclusion in income of the positive Sec. 481(a) adjustment in the year of change. This restriction does no apply to a credit arising in the year of change or to any future credit carrybacks to the year of change. If the adjustment decreases taxable income (negative adjustment), the adjustment shall be taken into account over the appropriate period (generally not be exceed six taxable years).

In the case of property that is inventory in the hands of the taxpayer, the adjustment required under Sec. 481(a) is the difference at the beginning of the year of change between the inventory as valued under the taxpayer's present method of determining costs and the invetory as revalued in accordance with Sec. 263A and accompanying regulations.

In the case of property that is not inventory in the hands of the taxpayer, the Sec. 481(a) adjustment is the difference at the beginning of the year of change between the basis of such property as determined under the taxpayer's present method and the basis redetermined by applying the provisions of Sec. 263A, and regulations, to costs incurred after December 31, 1986 (regardless of the taxpayer's taxable year). An example of this is self-constructed real property and its related accumulated depreciation.

Retroactive Change of

Accounting Method

The IRS has ruled that a taxpayer may not, without consent of the Comminssioner, retroactively change from an erroneous accounting method to a permissible method through filing amended returns. This rules applies even if the period for amending the return for the first year of use of the erroneous method has not yet expired (Rev. Rul. 90-38). Prior filing of amended tax returns was permitted, under certain conditions, by Notice 88-78.

Taxpayers Under Examination

If a taxpayer whose method of determining costs incurred in the production or acquisition of inventory property violated the provisions of Sec. 263A has been contacted in any manner by a representative of the IRS for the purpose of scheduling an examination of its Federal income tax return for a taxable year beginning after Dec. 31, 1986 (or, in the case of non-inventory property, taxable years ending after December 31, 1986), the change in method of accounting required to comply with the provisions of Sec. 263A shall be made by the district director. The entire positive adjustment required under Sec. 481(a) to comply with Sec. 263A, and regulations, will be taken into account in computing taxable income of the year of change, and will be subject to the limitations as set forth above.