SECTION 10. LAST-IN — Internal Revenue Bulletin 1997-33

(LIFO) INVENTORIES (§ 472)

.01 Change from the LIFO inventory method.

(a) Applicability. This change applies to an accrual method employer that wants to change its method of accounting for FICA and FUTA taxes to a method consistent with the holding in Rev. Rul. 96–51, 1996–43 I.R.B. 5. Rev. Rul. 96–51 holds that, under the all events test of § 461, an accrual method employer may deduct in Year 1 its otherwise deductible FICA and FUTA taxes imposed with respect to year-end wages properly accrued in Year 1, but paid in Year 2, if the requirements of the recurring item exception are met.

(b) Inapplicability. This change does not apply to a taxpayer that is subject to § 263A and that is required to capitalize the costs with respect to which the taxpayer wants to change its method of accounting under section 8.04 of this APPENDIX, if the taxpayer is not capitalizing the costs as required.

(2) Recurring item exception. As part of this change, a taxpayer that previously has not changed to or adopted the recurring item exception for FICA and FUTA taxes must change to the recurring item exception method for FICA and FUTA taxes as specified in § 461(h)(3).

(1) Description of change and scope.

method that is a permitted method, then the taxpayer must use that same inventory method for its entire inventory.

(B) If the LIFO inventory method is used by the taxpayer with respect to all its inventoriable goods, then the taxpayer must use the same inventory method it used prior to the adoption of the LIFO inventory method, if that prior method is a permitted method.

(C) If the taxpayer has only LIFO inventory and the method used by the taxpayer prior to the adoption of the LIFO inventory method is not a permitted method, then the taxpayer must use a permitted method.

(D) If the taxpayer did not use an inventory method prior to the adoption of the LIFO inventory method and has no inventoriable goods other than its LIFO inventory, then the taxpayer must use a permitted method.

(ii) Permitted method defined. For purposes of section 10.01 of this APPENDIX, a permitted method is a method under which:

(A) the identification method is either the first-in, first-out (FIFO) inventory method or the specific identification inventory method; and

(B) the valuation method is cost; cost or market, whichever is lower; market (but only if the taxpayer is a dealer in securities, as defined in § 1.471–5); the “farm price method” or the “unit-livestock-price method” (but only if the taxpayer is a farmer permitted to use such methods); or the retail method, reduced to either approximate cost or approximate cost or market, whichever is lower (but only if the taxpayer is a retail merchant).

(iii) Method not to be used. The average cost method (sometimes also referred to as “the rolling average method”) described in Rev. Rul. 71–234, 1971–1 C.B. 148, is not a permitted method.

(iv) Determining permitted method. Whether an inventory method is a permitted method is determined by the taxpayer’s method of inventory identification and valuation, and not by which types and amounts of costs are capitalized under the taxpayer’s method of computing inventory cost. See § 263A and the regulations thereunder, which govern the types and amounts of costs required to be included in inventory cost for taxpayers subject to those provisions.

(a) In general. This change, which was formerly provided in Rev. Proc. 88–15, 1988–1 C.B. 683, applies to any taxpayer that wants to:

(i) change from the LIFO inventory method for all its LIFO inventory; and

(ii) change to the permitted method as determined in section 10.01(1)(b) of this APPENDIX. (b) Method to be used.

(i) Determining method to be used. The inventory method to be used by a taxpayer is determined as follows:

(A) If the taxpayer has inventoriable goods not included in its LIFO inventory computations (non-LIFO inventory) and, for all the taxpayer’s non-LIFO inventory, the taxpayer uses an inventory

1997–33 I.R.B. 39 August 18, 1997

(2) Limitation on LIFO election. The taxpayer may not re-elect the LIFO inventory method for a period of at least five taxable years beginning with the year of change, unless based on a showing of unusual and compelling circumstances, consent is specifically granted by the Commissioner to change the method of accounting at an earlier time. The request for consent to readopt the LIFO inventory method must comply with Rev. Proc. 97–27. (3) Effect of subchapter S election by corporation.

(a) S election effective for year of LIFO discontinuance. If a C corporation elects to be treated as an S corporation for the taxable year in which it discontinues use of the LIFO inventory method, § 1363(d) requires an increase in the taxpayer’s gross income for the LIFO recapture amount (as defined in § 1363(d)(3)) for the taxable year preceding the year of change (the taxpayer’s last taxable year as a C corporation), and a corresponding adjustment to the basis of the taxpayer’s inventory as of the end of the taxable year preceding the year of change. Any increase in income tax as a result of the inclusion of the LIFO recapture amount is payable in four equal installments, beginning with the taxpayer’s last taxable year as a C corporation as provided in § 1363(d)(2). Any corresponding basis adjustment is taken into account in computing the § 481(a) adjustment (if any) that results upon the discontinuance of the LIFO method by the corporation.

(b) S election effective for a year after LIFO discontinuance. If a C corporation elects to be treated as an S corporation for a taxable year after the taxable year in which it discontinued use of the LIFO inventory method, the remaining balance of any positive § 481(a) adjustment must be included in its gross income in its last taxable year as a C corporation. If this inclusion results in an increase in tax for its last taxable year as a C corporation, this increase in tax is payable in four equal installments, beginning with the taxpayer’s last taxable year as a C corporation as provided in § 1363(d)(2), unless the taxpayer is required to take the remaining balance of the § 481(a) adjustment into account in the last taxable year as a C corporation under another accelera

tion provision in section 5.02(3)(c) of this revenue procedure.

(4) Additional requirements. The taxpayer must complete the following statements and attach them to the application:

(a) “The new method of identifying inventory goods is the [insert method; that is, specific identification; FIFO; retail; etc.] method.”

(b) “The new method of valuing inventory goods is [insert method; that is, cost; cost or market, whichever is lower; etc.].”

[insert either (A), (B), (C), or (D)] of the APPENDIX of Rev. Proc. 97–37 because

[explain in detail how the new method conforms to the specific subdivision].”

.02 Determining the cost of used vehi- cles purchased or taken as a trade-in.

(1) Description of change and scope. This change applies to a LIFO taxpayer that wants to:

(a) determine the cost of used vehicles acquired by trade-in using the average wholesale price listed by an official used car guide on the date of the trade-in. See Rev. Rul. 67–107, 1967–1 C.B. 115. The official used car guide selected must be consistently used;

(b) determine the cost of used vehicles purchased for cash using the actual purchase price of the vehicle; or

(c) reconstruct the beginning-ofthe-year cost of used vehicles purchased for cash using values computed by national auto auction companies based on vehicles purchased for cash. The national auto auction company selected must be consistently used.

(2) Manner of making the change. This change is made using a cut-off method and applies to used vehicles acquired during the year of change and all subsequent years. See section 2.06 of this revenue procedure.

.03 Alternative LIFO inventory method for retail automobile dealers.

ternative LIFO Method” described in section 4 of Rev. Proc. 97–36, page 14, for its LIFO inventories of new automobiles and new light-duty trucks. Lightduty trucks are trucks with a gross vehicle weight of 14,000 pounds or less, which also are referred to as class 1, 2, or 3 trucks. (b) Inapplicability. This change does not apply to an automobile dealer that uses the inventory price index computation (IPIC) method for goods other than new automobiles, new light-duty trucks, parts and accessories, used automobiles, and used trucks.

(2) Manner of making the change.

(1) Description of change and scope.

(a) Cut-off method. This change is made using a cut-off method. See section 2.06 of this revenue procedure and section 5.03(6) of Rev. Proc. 97–36.

(b) IPIC method changes. An automobile dealer that uses the IPIC method also must change from the IPIC method under section 10.03 of this APPENDIX to another acceptable method for its goods other than new automobiles and new light-duty trucks. For parts and accessories, the automobile dealer must change to the dollar-value, index method, with all parts and accessories within each separate trade or business in a separate LIFO pool. For used vehicles, the automobile dealer must change to the dollar-value, linkchain method, with all used automobiles within each separate trade or business in one LIFO pool and all used trucks within each separate trade or business in another separate LIFO pool.

(i) the conditions in section 5.03 of Rev. Proc. 97–36; and (ii) for an automobile dealer changing from the IPIC method, the automobile dealer also must attach to the application a schedule setting forth the classes of goods for which the automobile dealer has elected to use the LIFO method and the accounting method changes being made under section 10.03 of this APPENDIX for each class of goods.

.04 Inventory price index computation (IPIC) method under the LIFO inventory method.

(a) Applicability. This change, which was formerly provided in Rev. Proc. 92–79, 1992–2 C.B. 457, applies to a taxpayer engaged in the trade or business of retail sales of new automobiles or new light-duty trucks (“automobile dealer”) that wants to change to the “Al

(1) Description of change and scope.

(a) This change applies to an eligible taxpayer that wants to change its

August 18, 1997 40 1997–33 I.R.B.

LIFO inventory method to use the IPIC method for its entire LIFO inventory in accordance with all the provisions of § 1.472–8(e)(3) and Rev. Proc. 84–57, 1984–2 C. B. 496. The taxpayer must: (i) in the case of the CPI Detailed Report, select an index from Table 3 (Consumer Price Index for All Urban Consumers (CPI–U): U.S. city average, detailed expenditure categories); and

(ii) in the case of the Producer Price Indexes, select an index from Table 6 (Producer price indexes and percent changes for commodity groupings and individual items).

(b) A taxpayer using the IPIC method must apply the inventory price index to its ending inventory valued at current-year cost, under the taxpayer’s method of determining current-year cost. See § 1.472–8(e)(2)(ii). Furthermore, there must be a nexus between the taxpayer’s method of determining current-year costs and the month to be used in selecting indexes. See § 1.472–8(e)(3)(iii)(C) and Rev. Rul. 89–29, 1989–1 C.B. 168. For example, if a taxpayer determines current-year cost by reference to the actual cost of goods purchased or produced during the taxable year in the order of acquisition (earliest acquisitions cost), then the inventory price index must be applied to the earliest acquisitions cost of ending inventory. In computing the inventory price index, such a taxpayer must select indexes from a month toward the beginning of its taxable year.

(c) A taxpayer may not change its method of pooling as part of a change made under section 10.04 of this APPENDIX, except to a method specifically authorized by § 1.472–8(e)(3)(iv) or section 3.04(1)(b) of Rev. Proc. 84–57. These special pooling rules do not apply to goods manufactured by the taxpayer. See § 1.472–8(b) for principles for establishing pools of manufacturers and processors.

(d) A taxpayer may change its method of determining current-year cost as part of a change made under section 10.04 of this APPENDIX by also following the provisions of section 10.05 of this APPENDIX. These changes may be made using a single application, provided the application is labeled as being filed under both sections 10.04 and 10.05 of this APPENDIX. See section 6.02(3) of this revenue procedure.

(2) Manner of making the change. This change is made using a cut-off method. See section 2.06 of this revenue procedure.

.05 Determining current-year cost under the LIFO inventory method.

(1) Description of change and scope. This change applies to a LIFO taxpayer that wants to change to a method of determining current year cost:

(a) by reference to the actual cost of the goods most recently purchased or produced;

(b) by reference to the actual cost of the goods purchased or produced during the taxable year in the order of acquisition; or

(c) by application of an average unit cost equal to the aggregate actual cost of all the goods purchased or produced throughout the taxable year divided by the total number of units so purchased or produced. See § 1.472–8(e)(2)(ii).

(2) Manner of making the change . This change is made using a cut-off method. See section 2.06 of this revenue procedure.