IRS Revenue Procedure
2002-12

Code Secs. 162, 63(a), 446, 481



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26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part I, sections 162, 263(a), 446, 481; 1.162-3, 1.263(a)-1,
1.446-1, 1.481-1.)




REV. PROC. 2002-12

SECTION 1. PURPOSE

This revenue procedure provides taxpayers engaged in the trade or
business of operating a restaurant or tavern (as defined in section 4.01
of this revenue procedure) with a safe harbor method of accounting for the
cost of "smallwares" (as defined in section 4.02 of this revenue
procedure) ("smallwares method"). This revenue procedure also provides a
procedure for such taxpayers to obtain automatic consent of the
Commissioner to change to the smallwares method.


SECTION 2. BACKGROUND

.01 The trade or business of operating a restaurant or tavern requires
the use of many items in the preparation, service, and storage of food and
beverages. Pots and pans, dishes, and glassware are common examples of
these items, known as "smallwares" in the restaurant industry. Generally,
an "opening package" of smallwares is purchased before a restaurant or
tavern opens its doors to customers. Although an opening package is made
up of hundreds or thousands of items, it is typically purchased as one
unit from the same vendor. Replacement items are thereafter purchased on
an ongoing basis. Industry data shows that the average cost of an opening
package of smallwares ranges from $10,000 to $50,000, and that smallwares
have an average useful life of slightly over one year.

.02 Section 162(a) of the Internal Revenue Code allows a deduction for
ordinary and necessary expenses paid or incurred during the taxable year
in carrying on a trade or business. Under section 1.162-3 of the Income
Tax Regulations, the cost of materials and supplies (other than incidental
materials and supplies) may be deducted only to the extent that the
materials and supplies are actually consumed and used in the taxpayer's
business during the taxable year.

.03 Section 263(a) provides that no deduction is allowed for the cost
of new buildings or of permanent improvements or betterments made to
increase the value of any property or estate. Section 1.263(a)-2(a)
provides examples of capital expenditures, such as the cost of
acquisition, construction, or erection of buildings, machinery and
equipment, furniture and fixtures, and similar property having a useful
life substantially beyond the taxable year.

.04 Except as otherwise provided, under sections 446(e) and 1.446-1(e),
a taxpayer must secure the consent of the Commissioner before changing a
method of accounting for federal income tax purposes. Section
1.446-1(e)(ii) authorizes the Commissioner to prescribe administrative
procedures setting forth the limitations, terms, and conditions deemed
necessary to permit a taxpayer to obtain consent to change a method of
accounting. Section 481(a) generally requires those adjustments necessary
to prevent amounts from being duplicated or omitted to be taken into
account when a 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.

.05 To resolve disputes concerning whether the cost of smallwares
should be accounted for as currently deductible expenses under section 162
or capital expenditures within the meaning of section 263(a), and to
simplify the record keeping requirements with respect to smallwares, the
Internal Revenue Service will permit a taxpayer engaged in the trade or
business of operating a restaurant or tavern that complies with the
requirements of this revenue procedure to account for the cost of
smallwares using the smallwares method provided in section 5 of this
revenue procedure.


SECTION 3. SCOPE

This revenue procedure applies to the cost of smallwares incurred by
taxpayers engaged in the trade or business of operating a restaurant or
tavern. It does not apply to the cost of smallwares that are start-up
expenditures as defined in section 195. Thus, a taxpayer that is not
already engaged in the trade or business of operating a restaurant that
opens a new restaurant may not use the smallwares method provided in
section 5 of this revenue procedure to account for the cost of smallwares
paid or incurred before the new restaurant opens.


SECTION 4. DEFINITIONS

.01 TRADE OR BUSINESS OF OPERATING A RESTAURANT OR TAVERN. For purposes
of this revenue procedure, a taxpayer is engaged in the trade or business
of operating a restaurant or tavern if the taxpayer's business consists of
preparing food and beverages to customer order for immediate on-premises
or off-premises consumption. These businesses include, for example,
full-service restaurants; limited-service eating places; cafeterias;
special food services, such as food service contractors, caterers, and
mobile food services; and, bars, taverns, and other drinking places. For
purposes of this revenue procedure, the trade or business of operating a
restaurant or tavern also may include food or beverage services at grocery
stores, hotels and motels, amusement parks, theaters, casinos, country
clubs, and similar social or recreational facilities.

.02 SMALLWARES. For purposes of this revenue procedure, smallwares
consist of the following ten categories of items: (1) Glassware and paper
or plastic cups; (2) Flatware (silverware) and plastic utensils; (3)
Dinnerware (dishes) and paper or plastic plates; (4) Pots and Pans; (5)
Table Top Items; (6) Bar Supplies; (7) Food Preparation Utensils and
Tools; (8) Storage Supplies; (9) Service Items; and (10) Small Appliances
that cost $500 or less. Categories 5 through 10 include, but are not
limited to, the items listed below:

(5) TABLE TOP ITEMS include items placed on customer tables, such as
salt and pepper shakers, cheese shakers, ash trays, teapots, cruets, sugar
caddies, tablecloths, napkins, menu holders, menus, vases, candles, and
candleholders.

(6) BAR SUPPLIES include mixing glasses, bar strainers, cutting boards,
liquor pourers, jiggers, corkscrews, bottle openers, storage bottles, wine
and champagne stoppers, bar caddies, wine coolers, decanters, salt and
sugar glass rimmers, slow pourers, and malt shakers.

(7) FOOD PREPARATION UTENSILS AND TOOLS include hand utensils (spoons,
spatulas, wisks, peelers, etc.), pastry and grill brushes, skimmers,
knives, kitchen shears, cutting boards, strainers, colanders, shakers,
dippers, measuring cups and spoons, thermometers, gloves, goggles, timers,
scales, shaker baskets, salad spinners, lettuce crispers, sifters, pastry
bags and tubes, mixing bowls, pot holders, kitchen towels, cheesecloths,
and kitchen staff uniforms.

(8) STORAGE SUPPLIES include food containers, flatware sorters, dish
containers, and spice racks.

(9) SERVICE ITEMS include pepper mills, cheese graters, bread boards,
pitchers, squeeze dispensers, coffee pots, napkin receptacles, flatware,
plate, glass, and mug storage racks, wait staff and self-serve trays, soup
and salad bar trays and containers, bus tubs, tray carts, booster seats,
and wait staff uniforms.

(10) SMALL APPLIANCES include iced tea dispensers, can openers,
condiment pumps, individual food warmers, heat lamps, slicers, glass
washers, electric knife sharpeners, blenders, juicers, and nonindustrial
mixers. Small appliances do not include appliances that cost in excess of
$500.


For purposes of this revenue procedure, smallwares do not include office
supplies, general purpose cleaning supplies, or general purpose
maintenance tools. In addition, smallwares do not include extraordinary
items, such as collectibles or other items of significant artistic or
intrinsic value, items that are accounted for separately for tax or
financial purposes, or items that generally are listed as scheduled
property for insurance purposes. Examples of extraordinary items are
flatware or dinnerware made of precious metals, and antique vases used for
centerpiece or display purposes.


SECTION 5. SMALLWARES METHOD

.01 Taxpayers within the scope of this revenue procedure are permitted
to account for smallwares in the same manner as materials and supplies
that are not incidental under section 1.162-3.

.02 Under section 1.162-3, the costs of materials and supplies that are
not incidental are deductible in the year in which the materials and
supplies are actually consumed and used in a taxpayer's business.

.03 For purposes of this revenue procedure, smallwares are consumed and
used in a taxpayer's business, within the meaning of section 1.162-3, in
the taxable year in which they are received at the restaurant and are
available for use. For purposes of this revenue procedure, "received at
the restaurant and available for use" does not include smallwares
purchased and stored at a warehouse or facility other than the restaurant
where the smallwares will be used.


SECTION 6. CHANGE IN METHOD OF ACCOUNTING

.01 LIMITATIONS, TERMS, AND CONDITIONS. A change in a taxpayer's
treatment of the cost of smallwares to the smallwares method provided in
section 5 of this revenue procedure is a change in method of accounting to
which sections 446 and 481 apply. A taxpayer that wants to change its
method of accounting for the cost of smallwares to the smallwares method
provided in section 5 of this revenue procedure must follow the automatic
change in method of accounting provisions of Rev. Proc. 2002-9 (2002-3
I.R.B. 327) (or its successor) with the following modification: the scope
limitations in section 4.02 of Rev. Proc. 2002-9 do not apply. However, if
a taxpayer is under examination, before an area appeals office, or before
a federal court with respect to any income tax issue at the time that a
copy of the Form 3115, Application for Change in Accounting Method, is
filed with the national office, the taxpayer must provide a copy of the
Form 3115 to the examining agent, appeals officer, or counsel for the
government, as appropriate, at the same time the copy of the Form 3115 is
filed with the national office. The Form 3115 must contain the name(s) and
telephone number(s) of the examining agent, appeals officer, or counsel
for the government, as appropriate.

.02 AUDIT PROTECTION. If a taxpayer complies with the requirements of
this revenue procedure and changes its method of accounting for the cost
of smallwares to the smallwares method provided in section 5 of this
revenue procedure, the treatment of those costs will not be raised as an
issue in any taxable year before the year of change and, if the treatment
of the cost of smallwares has already been raised as an issue in a taxable
year before the year of change, that issue will not be further pursued.

.03 SECTION 481(a) ADJUSTMENT. A taxpayer changing its method of
accounting under this revenue procedure for the cost of smallwares must
take the entire net amount of any section 481(a) adjustment into account
in computing taxable income for the year of change.


SECTION 7. EFFECTIVE DATE

This revenue procedure is effective for taxable years ending on or
after December 31, 2001.


DRAFTING INFORMATION

The principal author of this revenue procedure is Angella L. Warren of
the Office of Associate Chief Counsel (Income Tax and Accounting). For
further information regarding this revenue procedure, contact Ms. Warren
at (202) 622-4950 (not a toll-free call).

<<END RULING>>


 

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