Tangible-property method change protects pre-change material costs from audit adjustment

Plain-English summary

Chief Counsel considered a taxpayer that timely filed Form 3115 to adopt the final tangible property regulations for non-incidental materials and supplies, using the limited section 481(a) adjustment allowed by Rev. Proc. 2015-14. The advice concluded that the taxpayer receives audit protection for the same item in years before the year of change, including costs incurred before 2014 that were excluded from the limited adjustment. The IRS therefore cannot require a prior-year accounting-method change for those costs. The taxpayer also cannot make a later additional change for the same item merely to reach those older costs, although changes for other items must follow the applicable revenue procedures and include any required section 481(a) adjustment.

Ruling snapshot

• Question: Does a timely tangible-property method change with a limited section 481(a) adjustment protect older costs for the same item from audit adjustment?
• Outcome: Advice given: yes, the general audit-protection rule applies.
• Key authorities: IRC § 481(a); Treas. Reg. § 1.162-3(a)(1) and (c)(1); Rev. Procs. 2015-13 §§ 8.01-8.02 and 2015-14 § 10.11

Full text (IRS public release)

ID:      CCA_2016031510335151
UILC:    162.15-02, 263.13-00, 446.00-00

Number: 201614037
Release Date: 4/1/2016
From: -----------------------
Sent: Tuesday, March 15, 2016 10:33:51 AM
To: ------------------------
Cc:

Bcc:
Subject: Question Re: Audit Protection For Tangibles Method Changes


Recently, you posed a question regarding audit protection for changes under the final
tangible property regulations. Specifically, you asked whether a taxpayer that makes
an automatic change in method of accounting to utilize the final tangible regulations
pursuant to section 10.11 of Rev. Proc. 2015-14, 2015-5 I.R.B 450, and takes into
account the limited § 481(a) adjustment for that change as required by section
10.11(6)(b)(i) of that revenue procedure, should have audit protection for that item in
taxable years prior to the year of change, or at least prior to the date that amounts paid
or incurred for the item may be included in the § 481(a) adjustment. Your example
involved a taxpayer that made an automatic change for its taxable year beginning 1-1-
14 under section 10.11(3)(a)(i) to deduct non-incidental materials and supplies in the
taxable year they are used or consumed in accordance with § 1.162-3(a)(1) and (c)(1).
Under section 10.11(6)(b)(i) of Rev. Proc. 2015-14, the taxpayer calculated its § 481(a)
adjustment taking into account only amounts paid or incurred in taxable years beginning
on or after 1-1-14. Your question was: for costs paid or incurred by the taxpayer in
taxable years beginning prior to 1-1-14, whether Exam can examine or change the
taxpayer’s method of accounting for non-incidental materials and supplies that were
deducted when paid or incurred by the taxpayer to the correct method of deducting
those items when they were used or consumed in the taxpayer’s operations.

Under your example, we believe that the taxpayer has audit protection for the costs of
non-incidental materials and supplies paid or incurred prior to 1-1-14. Section 8.01 of
Rev. Proc. 2015-13, 2015-5 I.R.B. 419, provides that, except as otherwise provided in
section 8.02 of Rev. Proc. 2015-13 or under any guidance provided in the I.R.B., when
a taxpayer timely files a Form 3115, the IRS will not require the taxpayer to change its
method of accounting for the same item for a taxable year prior to the requested year of
change. Note that section 10.11 of Rev. Proc. 2015-14, addressing automatic method
changes under tangible property regulations, does not specifically address audit
protection for taxpayers that file method changes under its general provisions or its
provisions for automatic changes made with a limited adjustment. Therefore, the
general rule under section 8.01 of Rev. Proc. 2015-13 should apply to these changes.
If the taxpayer timely filed a Form 3115 for 2014 to change its method of accounting for
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non-incidental materials and supplies pursuant to section 10.11(3)(a)(i) of Rev. Proc.
2015-14, and properly included the limited § 481(a) adjustment, then the IRS cannot
require the taxpayer to change its method of accounting for its non-incidental materials
and supplies costs incurred prior to the year of change.

For the same reasons, if a taxpayer made an automatic change in method of accounting
to utilize the final tangible regulations pursuant to section 10.11 of Rev. Proc. 2015-14,
2015-5 I.R.B. 450, and that change was made with the limited § 481(a) adjustment
required under section 10.11(6)(b) of that revenue procedure, this taxpayer cannot
request a subsequent or additional method change for the same item, but only for costs
paid or incurred prior to taxable years beginning prior to 1-1-14. For these purposes,
we believe the taxpayer would have already made the appropriate method change for
all costs paid or incurred for these items, and the taxpayer would have taken into
account the appropriate § 481(a) adjustment for these items, regardless of the taxable
year in which such costs were incurred. As with any change in method of accounting
under the final tangible property regulations, a taxpayer that desires to change its
method of accounting for any item that it previously changed under section 10.11 of
Rev. Proc. 2015-14 or for any item that it has not yet changed under section 10.11,
must change to a method under the final tangible property regulations using the
procedures under Rev. Proc. 2015-13 and Rev. Proc. 2015-14 (but only if the taxpayer
meets the eligibility requirements for an automatic change), and the taxpayer must
include a § 481(a) adjustment as appropriate under the final tangible property
regulations.

I hope that this information was helpful. If you need additional information, please give
me a call.