SECTION 6. EXAMPLE

.01 The following example illustrates the index selection and computation procedure described in section 5 of this revenue procedure. X, a retailer, uses the retail inventory method along with the dollar-value LIFO and IPIC inventory methods and files its returns on the basis of a taxable year ending on January 31. Under § 1.472–8(e)(3)(iii)(C), X is required to select indexes from the CPI as of January, the last month of X ’s taxable year. X has five items in its only dollarvalue LIFO pool on January 31, 1998— tomatoes, bananas, lemons, oranges, and peaches. The retail selling prices of the goods were tomatoes, $1,000; bananas, $80; lemons, $50; oranges, $50; and peaches, $20.

.02 Pursuant to § 1.472–8(e)(3)(iii)(B), X assigns the items to the most detailed listings in the January 1998 CPI as follows: tomatoes are assigned to “Toma

toes;” 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.”

.03 X selects the index for “Tomatoes” because tomatoes represent more than 10% of its total inventory value. §§ 1.472–8(e)(3)(iii)(B)(1) and (4). X can compute a total percent change for “Tomatoes” in accordance with §§ 1.472– 8(e)(3)(ii) and (iii) using the information contained in the CPI for January 1997 and January 1998. Thus, the “Tomatoes” index category is not an affected index category, and X must compute the total percent change for that index category in accordance with §§ 1.472–8(e)(3)(ii) and (iii). Because no remaining detailed index category contains 10% or more of X ’s total inventory value, X must investigate successively less detailed index category levels. § 1.472–8(e)(3)(iii)(B)(2). X discovers that the remainder of its inventory fits within the “Fresh fruits” index category. X, however, may not use the published “Fresh fruits” index for the remainder of its goods, because X ’s inventory does not include apples. § 1.472– 8(e)(3)(iii)(B)(5). X must compute a per

1998 Items Category Computation % Change

bananas Bananas = [(154.7 – 151.5) / 151.5)] - 100 = 2.1122 lemons Citrus f = [(105.6 – 100.0) / 100.0)] - 100 = 5.6000 oranges Oranges = [(201.3 – 189.3) / 189.3)] - 100 = 6.3391 peaches Other ff = [( 96.6 – 100.0) / 100.0)] - 100 = –3.4000

.05 Pursuant to section 5.01(2)(a) of this revenue procedure, X assigns the items to the most detailed index categories in the January 1997 CPI as fol

lows: bananas are assigned to “Bananas;” lemons are assigned to “Other fresh fruits;” oranges are assigned to “Oranges, including tangerines;” and peaches are as

signed to “Other fresh fruits.” Pursuant to section 5.01(2)(b) of this revenue procedure, X computes the percent changes for the first portion as follows:

1997 Items Category Computation % Change

bananas Bananas = [(151.5 – 161.9) / 161.9)] - 100 = –6.4237 lemons Other ff = [(294.9 – 290.2) / 290.2)] - 100 = 1.6196 oranges Oranges = [(189.3 – 187.4) / 187.4)] - 100 = 1.0139 peaches Other ff = [(294.9 – 290.2) / 290.2)] - 100 = 1.6196

.06 Pursuant to section 5.01(3) of this revenue procedure, X computes the total

percent change for each 1998 CPI detailed index category by combining the

corresponding percent changes for the first and second portions as follows:

1998–37 I.R.B. 11 September 14, 1998

1998 Category Computation % Change

Bananas = {[(102.1122 - 93.5763) / 100] – 100} = –4.4472 Citrus f = {[(105.6000 - 101.6196) / 100] – 100} = 7.3103 Oranges = {[(106.3391 - 101.0139) / 100] – 100} = 7.4173 Other ff = {[( 96.6000 - 101.6196) / 100] – 100} = –1.8355

Because the BLS published the total percent change for “Bananas” and “Oranges, including tangerines” in the January 1998 CPI, it was not necessary for X to com

pute a total percent change for those detailed index categories pursuant to section 5.01 of this revenue procedure. .07 Pursuant to section 5.02 of this rev

enue procedure, X computes the weights for each 1998 CPI detailed index category as follows:

Detailed Selected 1998 Category Category Detailed Category Cost Cost Weight

Bananas = $80 / $200 = 0.40 Citrus fruits = $50 / $200 = 0.25 Oranges = $50 / $200 = 0.25 Other fresh fruits = $20 / $200 = 0.10

Then, X weights the percent change for each 1998 CPI detailed index category

and adds them together to determine the total percent change for the “Fresh fruits”

index category as follows:

1998 Weighted Detailed Category Weight % Change % Change

Bananas = 0.40 - –4.4472 = –1.7789 Citrus fruits = 0.25 - 7.3103 = 1.8276 Oranges = 0.25 - 7.4173 = 1.8543 Other fresh fruits = 0.10 - –1.8355 = –0.1836 Total Percent Change +1.7194