SECTION 5. CHANGING TO THE

RETAIL SAFE HARBOR METHOD OR OTHER METHOD OF ESTIMATING INVENTORY SHRINKAGE

.01 In general. Any change in a taxpayer’s computation of ending inventory to estimate inventory shrinkage, or any change in the computation of such estimate, is a change in method of accounting to which the provisions of §§ 446 and 481 and the regulations thereunder apply.

.02 Automatic change. A taxpayer within the scope of this revenue procedure that wants to change to a method of accounting for estimating inventory shrinkage in computing ending inventory must follow the automatic change in accounting method provisions of Rev. Proc. 97–37, with the following modifications: (1) The scope limitations in section 4.02 of Rev. Proc. 97–37, as well as the application procedures in sections 6.03, 6.04, and 6.05 of Rev. Proc. 97–37, do not apply. However, if the taxpayer is under examination, before an appeals office, or before a federal court with respect to any income tax issue, the taxpayer must provide a copy of the Form 3115 to the examining agent(s), appeals officer, or counsel for the government, as appropri

1998–15 I.R.B. 23 April 13, 1998

ate, at the same time that it files the copy of the Form 3115 with the national office. The Form 3115 must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.

(2) A taxpayer that, on or before June 12, 1998, files its original federal income tax return for its first taxable year ending on or after August 5, 1997, is not subject to the filing requirement in section 6.02(2)(a) of Rev. Proc. 97–37, provided the taxpayer complies with the following filing requirement. The taxpayer must complete and file a Form 3115 in duplicate. The original must be attached to the taxpayer’s amended federal income tax return for the taxpayer’s first taxable year ending on or after August 5, 1997. This amended return must be filed no later than August 11, 1998. A copy of the Form 3115 must be filed with the national office (see section 6.02(6) of Rev. Proc. 97–37 for the address) no later than when the taxpayer’s amended return is filed.

(3) A taxpayer, whose present method of accounting estimates inventory shrinkage, does not receive audit protection under section 7 of Rev. Proc. 97– 37 in connection with a change to the retail safe harbor method if, on the date the taxpayer files a copy of the Form 3115 with the national office, the taxpayer’s present method of estimating inventory shrinkage is an issue under consideration within the meaning of section 3.09 of Rev. Proc. 97–37.

(4) In addition to all the requirements and procedures in Rev. Proc. 97-37, as modified by this revenue procedure, the following rules apply to a taxpayer within the scope of this revenue procedure that changes to a method other than the retail safe harbor method of accounting for estimating inventory shrinkage. The taxpayer must provide a detailed description of all aspects of the new method of estimating inventory shrinkage (including, for LIFO

taxpayers, the method of determining inventory shrinkage for, or allocating inventory shrinkage to, each LIFO pool) in the Form 3115 filed by the taxpayer for such a change. The District Director or national office subsequently may review whether the new method clearly reflects the taxpayer’s income under § 446(b). If the District Director or the national office determines that the new method of accounting does not clearly reflect the taxpayer’s income, the taxpayer will be treated as having made a change in method of accounting without obtaining the consent of the Commissioner as required by § 446(e). See section 6.06 of Rev. Proc. 97–37.

(5) For a change in method of accounting within the scope of this revenue procedure, the provisions of Rev. Proc. 97–37 are effective for taxable years ending after August 5, 1997.

(6) The transition rules in section 13.02 of Rev. Proc. 97–37 do not apply to any change in method of accounting within the scope of this revenue procedure. The Service will return any Form 3115 if it is filed with the national office pursuant to the Code, regulations, or administrative guidance other than Rev. Proc. 97–37 and the change in method of accounting is within the scope of this revenue procedure.

.03 Future change. A taxpayer that changes to the retail safe harbor method described in this revenue procedure will not be precluded, solely by reason of such change, from changing to another safe harbor method for estimating inventory shrinkage in computing ending inventory in the first year that such other safe harbor method is available.