SECTION 10. LAST-IN — Internal Revenue Bulletin 1999-52

(LIFO) INVENTORIES (§ 472)

.01 Change from the LIFO inventory method.

(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 permit

(1) Description of change and scope.

ted 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 “unitlivestock-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.

(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. A taxpayer that wants to re-elect the LIFO inventory method within a period of five taxable years (beginning with the year of change) must file a Form 3115 in accordance with

(a) In general . This change 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 method that is a permitted method, then the taxpayer must use that same inventory method for its entire inventory.

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Rev. Proc. 97–27, 1997–1 C.B. 680. A taxpayer that wants to re-elect the LIFO inventory method after a period of five taxable years (beginning with the year of change) is not required to file a Form 3115 in accordance with Rev. Proc. 97–27, but must file a Form 970, Application to Use LIFO Inventory Method, in accordance with § 1.472–3.

(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 acceleration 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. 99–49 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.

(a) Applicability. This change 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 “Alternative LIFO Method” described in section 4 of Rev. Proc. 97–36, 1997–2 C.B. 450, for its LIFO inventories of new automobiles and new light-duty trucks. Light-duty 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 .

(1) Description of change and scope .

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

1999–52 I.R.B. 753 December 27, 1999

(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.

(3) Bargain purchase. If the taxpayer has previously improperly accounted for a bulk bargain purchase, the taxpayer must, as part of this change, first change its method of accounting to com

ply with Hamilton Industries, Inc. v. Com- missioner, 97 T.C. 120 (1991), and compute a § 481(a) adjustment for that part of the change. See Announcement 91–173, 1991–47 I.R.B. 29. Upon examination, if a taxpayer has properly changed under section 10.04 of this APPENDIX except for complying with section 10.04(3) of this APPENDIX, an examining agent may not deny the taxpayer the change. However, the taxpayer does not receive audit protection under section 7 of this revenue procedure with respect to the improper method of accounting for the bargain purchase. Accordingly, the examining agent may make any necessary adjustments in any open year to effect compliance with Hamilton Industries, Inc .

.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.

SECTION 10A. MARK-TO-MARKET ACCOUNTING METHOD FOR DEALERS IN SECURITIES (§ 475)

(a) Applicability . This change applies to:

(i) a taxpayer that must discontinue the use of the mark-to-market method of accounting for nonfinancial customer paper to comply with § 475(c)(4), enacted by § 7003 of the IRS Restructuring and Reform Act of 1998,

Pub. L. No. 105–206, 112 Stat. 833 (July 22, 1998), provided the change is made for the taxpayer’s first taxable year ending after July 22, 1998. The taxpayer must change to a method other than the lower of cost or market method; and

(ii) a taxpayer that was a dealer in securities solely because of its dealings in nonfinancial customer paper, that, in conjunction with the change under section 10A.01(1)(a)(i) of this APPENDIX, wants to discontinue the use of the markto-market method of accounting for all securities (including nonfinancial customer paper).

(b) Scope limitations inapplicable. A taxpayer that wants to make this change is not subject to the scope limitations in section 4.02 of this revenue procedure. However, if the taxpayer is under examination, before an appeals office, or before a federal court, the taxpayer must provide a copy of the application to the examining agent(s), appeals officer, or counsel for the government, as appropriate, at the same time that it files the copy of the application with the national office. The application must contain the name(s) and telephone number(s) of the examining agent(s), appeals officer, or counsel for the government, as appropriate.

(2) Additional Requirements.

.01 Discontinuing the mark-to-market method of accounting for nonfinancial customer paper.

(1) Description of change and scope.

(a) On a statement attached to the application, the taxpayer must describe all items that were marked to market and that will no longer be marked to market.

(b) When complying with section 6.02(3) of this revenue procedure, the taxpayer should indicate whether the taxpayer is changing under section 10A.01(1)(a)(i) or sections 10A.01(1)(a)(i) and (ii) of this APPENDIX.

(3) No audit protection . A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.

.02 Commodities dealers, securities traders, and commodities traders electing to use the mark-to-market method of ac- counting under § 475(e) or (f).

(1) Description of change . This change applies to certain taxpayers that have elected to use the mark-to-market method of accounting under § 475(e) or (f). Under § 475(e) and (f) and Rev. Proc. 99–17, 1999–7 I.R.B. 52, if a taxpayer makes an election under § 475(e) or (f),

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then beginning with the first taxable year for which the election is effective (election year), mark to market is the only permissible method of accounting for securities or commodities subject to the election. Thus, if the electing taxpayer’s method of accounting for its taxable year immediately preceding the election year is inconsistent with § 475, the taxpayer is required to change its method of accounting to comply with the election. A taxpayer that makes a § 475(e) or (f) election but fails to change its method of accounting to comply with that election is using an impermissible method. See section 4 of Rev. Proc. 99–17.

cluding a bank for which a qualified subchapter S subsidiary (QSSS) election is filed) that wants to change its method of accounting for bad debts from the § 585 reserve method to the § 166 specific charge-off method.

(b) Certain scope limitations inap- plicable. A bank that changed from the § 593 reserve method under § 593(g) to the § 585 reserve method will not be prohibited under section 4.02(6) of this revenue procedure from changing its method of accounting for bad debts under section 11.01 of this APPENDIX solely because of the § 593(g) change. A bank for which a QSSS election is filed will not be prohibited under section 4.02(7) of this revenue procedure from changing its method of accounting for bad debts under section 11.01 of this APPENDIX solely because of the deemed liquidation of the bank arising from a QSSS election.

(2) Section 481(a) adjustment. Generally, the amount of the § 481(a) adjustment for a change in method of accounting under section 11.01 of this APPENDIX is the amount of the bank’s reserve for bad debts as of the close of the taxable year immediately before the year of change. However, the amount of the § 481(a) adjustment does not include the amount of a bank’s pre-1988 reserves (as described in § 593(g)(2)(A)(ii), without taking into account § 593(g)(2)(B)) if the bank changed in a prior year from the § 593 reserve method to the § 585 reserve method and § 593(g) applied to that change. The deemed liquidation of a bank occurring solely because its parent makes a QSSS election does not accelerate the § 481(a) adjustment. In accordance with section 5.04(3)(c) of this revenue procedure, a bank that ceases to be a bank under § 581 must accelerate its § 481(a) adjustment.

(3) Change from § 585 required when electing S corporation status . A bank electing S corporation status (or a bank for which a QSSS election is filed) cannot use the § 585 reserve method. The filing by a bank of a Form 2553 (Election by a Small Business Corporation) or the filing by a bank’s parent of a QSSS election with respect to the bank will constitute an agree

ment by the bank to change its method of accounting for bad debts from the § 585 reserve method to the § 166 specific charge-off method effective as of the taxable year for which the S corporation election or QSSS election is effective (year of change) in accordance with all of the applicable provisions of this revenue procedure (including section 6 of this revenue procedure, which requires filing a Form 3115 in duplicate). The § 481(a) adjustment is recognized built-in gain under § 1374. See § 1.1374–4(d). .02 Reserved .