SECTION 5. PROCEDURE

.01 When a revised CPI or PPI includes new index categories or eliminates or resets old index categories, a taxpayer may compute a total percent change for each affected index category represented in the taxpayer’s ending inventory in accordance with the procedure provided in this section 5.01. This total percent change will be a combination of the percent change for the second portion of the taxable year based on the revised index category and the corresponding percent change for the first portion of the taxable year based on the old index category.

(1) A taxpayer must first compute the percent change for each affected index category set forth in the revised CPI or PPI for the period between the first month covered by the revised CPI or PPI and the index month (“the second portion”) as follows:

(a) Using the appropriate table of the revised CPI or PPI for the index month, all specific inventory items must be placed in the most detailed index category that includes that specific inventory item (without regard to the index selection requirements in § 1.472–8(e)(3)(iii)(B)).

(b) The percent change of each revised CPI or PPI index category for the second portion is determined using the following formula:

[(A-B) / B) * 100]

inventory item (without regard to the index selection requirements of § 1.472– 8(e)(3)(iii)(B)). (b) The percent change of each old CPI or PPI index category for the first portion is determined using the following formula:

[(C–D) / D) * 100]

where: C = Cumulative index for last month of

old CPI or PPI as published for the last month of old CPI or PPI (adjusted, as necessary, to reflect a cost or retail price index) D = Cumulative index for preceding

year’s index month (adjusted, as necessary, to reflect a cost or retail price index). (3) The taxpayer will then determine the total percent change for each index category set forth in the revised CPI or PPI represented in the ending inventory by combining the percent change for the second portion with the corresponding percent change for the first portion using the following formula:

where: A = Cumulative index for index month

(adjusted, as necessary, to reflect a cost or retail price index) B = Cumulative index for last month of

old CPI or PPI as published for the first month of revised CPI or PPI (adjusted, as necessary, to reflect a cost or retail price index). (2) A taxpayer must then compute a percent change for each affected index category set forth in the old CPI or PPI for the period between the preceding year’s index month and the last month covered by the old CPI or PPI (“the first portion”) as follows:

(a) Using the appropriate table of the old CPI or PPI for the preceding year’s index month, all specific inventory items must be placed in the most detailed index category that includes that specific

({[(X + 100) * (Y + 100)] / 100} – 100)

where: X = Percent change for the second por tion Y = Percent change for the first por tion. For purposes of computing the total percent change for each revised CPI or PPI index category, the corresponding percent change for the first portion is the percent change for the old CPI or PPI index category that includes the specific inventory item(s) included in the revised CPI or PPI index category. If specific inventory items included in a single revised CPI or PPI index category were separately included in different old CPI or PPI index categories, the corresponding percent change for the first portion is the weighted average percent change of such old CPI or PPI percent changes. The costs to be used in computing such weighted average must be the relative current-year costs in ending inventory.

.02 When § 1.472–8(e)(3)(iii)(B)(5) requires a taxpayer to compute a percent change for a selected index category using the BLS weights and the CPI or PPI does not report the relative weights for one or more of the taxpayer’s detailed

September 14, 1998 10 1998–37 I.R.B.

cent change for the “Fresh fruits” index category using the BLS indexes and weights published for the detailed index categories actually present in its inventory. Id. However, the BLS did not publish a cumulative index for “Citrus fruits” in the January 1997 CPI or weights for “Oranges, including tangerines” in the January 1998 CPI. Moreover, the BLS reset the base year for “Other fresh fruits” in the January 1998 CPI. Since X cannot compute a total percent change for “Fresh fruits” in strict conformity with §§ 1.4728(e)(3)(ii) and (iii), X chooses to compute such total percent change using the method described in section 5 of this revenue procedure.

.04 Pursuant to section 5.01(1)(a) of this revenue procedure, X assigns the inventory items within the affected “Fresh fruits” category to the most detailed index categories in the 1998 CPI as follows: bananas are assigned to “Bananas;” lemons are assigned to “Citrus fruits;” oranges are assigned to “Oranges, including tangerines;” and peaches are assigned to “Other fresh fruits.” Pursuant to section 5.01(1)(b) of this revenue procedure, X computes the percent changes for the second portion as follows:

index categories within a selected index category, the taxpayer may weight the detailed index categories actually present in its ending inventory within such selected index category using the taxpayer’s actual inventory weights.