rp-10-44.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 1.263-1: Uniform Capitalization of Costs
(Also: 446; 1.263A-2, 1.263A-3, 1.446-1)

Rev. Proc. 2010-44

SECTION 1. PURPOSE
This revenue procedure provides that certain motor vehicle dealerships may use
either or both of the safe harbor methods of accounting provided by this revenue
procedure to (1) treat certain sales facilities as retail sales facilities for purposes of
§ 263A of the Internal Revenue Code, and (2) be treated as resellers without production
activities for purposes of § 263A. This revenue procedure also provides procedures for
obtaining automatic consent to make accounting method changes to use the safe
harbor methods.
SECTION 2. BACKGROUND

.01 Sections 263A(a) and 1.263A-1(a)(3)(i) of the Income Tax Regulations
require a taxpayer subject to § 263A to include in inventory costs direct costs and
indirect costs properly allocable to the taxpayer’s produced and acquired inventory
property.
.02 Section 1.263A-3(c)(1) requires a taxpayer that acquires property for resale
(reseller) to capitalize the acquisition cost of, and the indirect costs that are properly
allocable to, property acquired for resale. The indirect costs most often incurred by
resellers are purchasing, handling, and storage costs. However, a reseller is not
required to capitalize handling and storage costs incurred at a retail sales facility.
§§ 1.263A-3(c)(4)(i) and (c)(5).
.03 Handling costs include the costs of processing, assembling, repackaging,
transporting, and other similar activities that do not come within the meaning of the term
produce as defined in § 1.263A-2(a)(1). § 1.263A-3(c)(4).
.04 Section 1.263A-3(c)(5)(ii)(B) defines a retail sales facility as a facility where a
taxpayer sells merchandise exclusively to retail customers in on-site sales. For
purposes of § 1.263A-3(c)(5)(ii)(B), a retail sales facility includes those portions of any
specific retail site (i) that are customarily associated with and are an integral part of the
operations of that retail site; (ii) that are generally open each business day exclusively to
retail customers; (iii) on or in which retail customers normally and routinely shop to
select specific items of merchandise; and (iv) that are adjacent to or in immediate
proximity to other portions of the specific retail site.

.05 As explained in the example in § 1.263A-3(c)(5)(ii)(B)(2), two lots of an
automobile dealership physically separated by an alley or an access road are generally
considered one retail sales facility, provided customers routinely shop on both of the lots
to select the specific automobiles that they wish to acquire.
.06 Section 1.263A-3(c)(5)(ii)(E) defines a retail customer as the final purchaser
of the merchandise.
.07 Section 263A(i) provides that the Treasury Department will prescribe
regulations as may be necessary or appropriate to carry out the purposes of § 263A,
including providing for simplified procedures for the application of § 263A to property
acquired for resale.
.08 Section 1.263A-3(d) provides a simplified resale method for determining the
additional § 263A costs (within the meaning of § 1.263A-1(d)(3)) properly allocable to
property acquired for resale and other eligible property on hand at the end of the taxable
year.
.09 In the Conference Report accompanying the Tax Reform Act of 1986, Public
Law No. 99-514 (100 Stat. 2085 (1986)), the conferees directed the Treasury
Department to create a simplified method for applying the uniform capitalization rules of
§ 263A to resellers (resulting in the simplified resale method in § 1.263A-3(d)) and
authorized the Treasury Department to modify the simplified method or permit the use
of other methods by rules or regulations for property acquired for resale. H.R. Rep. No.
99-841 (Conf. Rep.), 99th Cong., 2d Sess. II-308 (1986).

.10 Sections 446(e) and 1.446-1(e)(2) state that, except as otherwise provided, a
taxpayer must secure the consent of the Commissioner before changing a method of
accounting for federal income tax purposes.
.11 Rev. Proc. 2008-52, 2008-2 C.B. 587 (as amplified, clarified, and modified
by Rev. Proc. 2009-39, 2009-2 C.B. 371), provides procedures for a taxpayer to obtain
automatic consent of the Commissioner to change to a method of accounting described
in the APPENDIX of Rev. Proc. 2008-52. Rev. Proc. 97-27, 1997-1 C.B. 680 (as
modified and amplified by Rev. Proc. 2002-19, 2002-1 C.B. 696, as amplified and
clarified by Rev. Proc. 2002-54, 2002-2 C.B. 432, as modified by Rev. Proc. 2007-67,
2007-2 C.B. 1072, and as clarified and modified by Rev. Proc. 2009-39), provides
procedures for a taxpayer to request non-automatic consent to change a method of
accounting.
SECTION 3. SCOPE
.01 Except as provided in section 3.02, any motor vehicle dealership, as defined
in section 4 of this revenue procedure, may use either or both of the safe harbor
methods described in section 5 of this revenue procedure.
.02 A motor vehicle dealership that removes § 471 costs from ending inventory
by treating them as negative amounts in the numerator of either the simplified resale
method formula or the simplified production method formula, may not use either safe
harbor method of accounting described in section 5 of this revenue procedure. If a
motor vehicle dealership currently removes § 471 costs from ending inventory in that

manner, it must change from that method of accounting in accordance with section 7 of
this revenue procedure in order to use the safe harbor methods.
SECTION 4. MOTOR VEHICLE DEALERSHIP
.01 For purposes of this revenue procedure, a motor vehicle dealership is a
dealership that primarily purchases and resells to retail customers, one or more of the
following categories of new or used motor vehicles:
(a) automobiles;
(b) light-duty trucks;
(c) medium-duty trucks;
(d) heavy-duty trucks;
(e) recreational vehicles;
(f) motorcycles;
(g) boats;
(h) farm machinery and equipment; or
(i) construction machinery and equipment.
SECTION 5. SAFE HARBOR METHODS
.01 Retail sales facility safe harbor method
. A motor vehicle dealership may
treat its entire sales facility from which it normally and routinely conducts on-site sales to
retail customers, including any vehicle lot that is an integral part of its sales facility and
that is routinely visited by retail customers, as a retail sales facility under § 1.263A-
3(c)(5)(ii)(B). A motor vehicle dealership using this retail sales facility safe harbor

method is not required to capitalize handling and storage costs incurred at its retail
sales facility.
.02 Reseller without production activities safe harbor method
. A motor vehicle
dealership may treat itself as a reseller without production activities for purposes of
§ 1.263A-3. For purposes of this revenue procedure, activities that a motor vehicle
dealership, or a contractor, perform on dealership-owned vehicles and customer-owned
vehicles are handling activities under §1.263A-3(c)(4), but the costs of these handling
activities, other than the cost of vehicle parts, are not required to be capitalized to the
extent incurred at the motor vehicle dealership’s retail sales facility. A motor vehicle
dealership must capitalize the cost of vehicle parts used on dealership-owned vehicles
as an acquisition cost of its vehicles, whether the vehicle parts are acquired directly by
the dealership or indirectly through a contractor. See §§ 1.471-3 and 1.263A-3(c)(1). A
motor vehicle dealership using the reseller without production activities safe harbor
method may use the simplified resale method under § 1.263A-3(d) for its vehicles and
other eligible property.
SECTION 6. CHANGE IN METHOD OF ACCOUNTING
A motor vehicle dealership that wants to change its method of accounting under
§ 263A to either or both of the safe harbor methods described in section 5 of this
revenue procedure must use the automatic change in method of accounting provisions
in Rev. Proc. 2008-52, as further modified by this revenue procedure, if the dealership is
within the scope of Rev. Proc. 2008-52. Otherwise, a motor vehicle dealership may

request to change its method of accounting using the non-automatic provisions of Rev.
Proc. 97-27, if the dealership is within the scope of Rev. Proc. 97-27.
SECTION 7. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2008-52 is modified to add new section 11.07 to the APPENDIX, to
read as follows:
.07 Safe harbor methods under § 263A for certain dealerships of motor
vehicles.
(1) Description of change
. This change applies to a motor vehicle
dealership, as defined in section 4 of Rev. Proc. 2010-44 that is within the scope of
section 3 of Rev. Proc. 2010-44 and wants to change its method of accounting to (1)
treat its sales facility as a retail sales facility or (2) be treated as a reseller without
production activities, as described in section 5 of Rev. Proc. 2010-44. A motor vehicle
dealership that wants to make an automatic change in method of accounting to use one
or both safe harbor methods described in section 5 of Rev. Proc. 2010-44 may make
any corresponding changes in the identification of costs subject to § 263A that will be
accounted for using the new method (for example, to remove internal profit from
inventory costs) or to no longer include negative amounts as additional § 263A costs in
the numerator of the simplified resale method formula or the simplified production
method formula. However, except as provided in the preceding sentence, a change
under this section does not include a change for purposes of recharacterizing Ҥ 471
costs” as “additional § 263A costs” (or vice versa
) under the simplified resale method or
the simplified production method.

(2) Certain scope limitations temporarily inapplicable. The scope
limitations in sections 4.02(1) through (4) and (7) of Rev. Proc. 2008-52, as modified
and clarified by Rev. Proc. 2009-39, do not apply to a motor vehicle dealership that
changes to one or both of the safe harbor methods in section 5 of Rev. Proc. 2010-44
for its first or second taxable year ending after November 9, 2010.
(3) Concurrent automatic changes
. A motor vehicle dealership making
an automatic change in method of accounting to one or both safe harbor methods
described in section 5 of Rev. Proc. 2010-44 and another automatic change in method
of accounting under § 263A for the same taxable year may file one Form 3115 to make
both changes, provided the dealership enters the designated automatic change
numbers for all such changes in Part I on that Form 3115, and complies with the
ordering rules of § 1.263A-7(b)(2).
(4) Multiple adjustments
. In the event that a motor vehicle dealership is
taking into account a § 481(a) adjustment from another accounting method change in
addition to the § 481(a) adjustment required by a change to a safe harbor method
described in section 5 of Rev. Proc. 2010-44, the § 481(a) adjustments must be taken
into account separately. For example, a motor vehicle dealership that changed to
comply with § 263A in 2009 and was required to take its § 481(a) adjustment into
account over four years must continue to take into account that adjustment over the
remainder of that four year § 481(a) adjustment period even though the dealership
changed to a safe harbor method described in section 5 of Rev. Proc. 2010-44 in 2010
and has an additional § 481(a) adjustment required by that change.

(5) Designated automatic accounting method change numbers. The
designated automatic accounting method change number for a change to treat certain
sales facilities as retail sales facilities as described in section 5.01 of Rev. Proc. 2010-
44 is “150.” The designated automatic accounting method change number for a change
to be treated as a reseller without production activities as described in section 5.02 of
Rev. Proc. 2010-44 is “151.”
(6) Contact information
. For further information regarding a change
under this section, contact Kari Fisher at (202) 622-4970.
SECTION 8. EXPANDED AUDIT PROTECTION
A motor vehicle dealership that changes its method of accounting under either
the automatic provisions of Rev. Proc. 2008-52 or the non-automatic provisions of Rev.
Proc. 97-27 to use a method of accounting consistent with the safe harbor methods
described in section 5 of this revenue procedure receives the audit protection described
in section 7 of Rev. Proc. 2008-52 or section 9 of Rev. Proc. 97-27, as applicable.
Alternatively, if a motor vehicle dealership uses a method of accounting
consistent with the safe harbor methods described in section 5 of this revenue
procedure on a federal income tax return filed before November 10, 2010, the Service
will not assert that these methods are not proper methods of accounting for such
taxable year(s).
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective November 9, 2010.

SECTION 10. DRAFTING INFORMATION
The principal author of this revenue procedure is Kari Fisher of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this revenue procedure contact Kari Fisher at (202) 622-4970 (not a toll free call).