TAM , 8/4/20061 Changes in Method of Accounting – Simplified Resale Method – Revocation of Erroneous Prior Letter Ruling Technical Advise Memorandum , 8/4/2006 Presented by Antonia Kwan

TAM , 8/4/20062 Facts Taxpayer Design & Select Samples Outside Vendor (Samples) In-House (Samples) Samples Design Samples

TAM , 8/4/20063 Facts Taxpayer (a retailer):  Does not manufacture any products.  Does not own any production facilities.  Provides instructions to vendors how the final products should look.  Selects most of the material used to make the finished products.

TAM , 8/4/20064 Facts Vendors  Will not disclose designs to any third party.  Will not use designs for their benefit.  Will treat Taxpayer’s trade secrets or information as confidential.  Will remove all reference to its tradenames or trademark on goods when Taxpayer cannot accept the goods and authorize their transfer to a third party.

TAM , 8/4/20065 Facts Date 2: Taxpayer filed Form 3115 to request the Commissioner’s consent to use the simplified resale method. Date 3: IRS National Office issued a ruling to grant the change. Examination team: Taxpayer is ineligible to use the simplified resale method and the consent to use that method should be revoked.

TAM , 8/4/20066 Main Issue: Does Taxpayer qualify to use the simplified resale method pursuant to § 1.263A-3(a)(4)?

TAM , 8/4/20067 Law § 1.263A-2(a)(1)(ii)(B)  Property produced for the taxpayer under a contract with another party is treated as property produced by the taxpayer except in the case of a routine purchase order for fungible property if the agreement is entered into before the production of the property to be delivered under the contract is completed.

TAM , 8/4/20068 Law § 1.263A-2(b)(1)  Producers may elect to use the simplified production method if engaged in both production and resale activities with respect to items of eligible property.

TAM , 8/4/20069 Law § 1.263A-3(d)  Resellers may elect to use the simplified resale method that is only available to a trade or business exclusively engaged in resale activities.

TAM , 8/4/ Law § 1.263A-3(a)(4) – Two Exceptions  1 st Exception: Reseller may use simplified resale method if its production activities with respect to the items of eligible property are de minimis and incident to its resale of personal property described in § 1221(1).

TAM , 8/4/ Law De Minimis: GR from sale of property < 10% of total GR of the trade or business AND Labor costs allocable to production activities < 10% of total labor costs allocable to its trade or business.

TAM , 8/4/ Law 2 nd Exception: A reseller may use the simplified resale method even though it has personal property produced for it under a contract with an unrelated person if the contract is entered into incident to its resale activities and the property is sold to its customers.

TAM , 8/4/ Analysis Taxpayer:  Reseller  Subject to 2 nd exception IRS:  Producer  Agreement does not qualify as a routine purchase order for fungible goods  Taxpayer controls the manufacturing process  Does not qualify for the exceptions

TAM , 8/4/ Conclusion Taxpayer does not qualify to use the simplified resale method pursuant to § 1.263A-3 because Taxpayer is a producer and does not qualify for the exceptions.

TAM , 8/4/ Thank you