SECTION 10. LAST-IN — Internal Revenue Bulletin 2002-3

(LIFO) INVENTORIES (§ 472)

.01 Change from the LIFO inventory method .

(1) Description of change and scope .

(4) Manner of making the change .

(a) In general . This change applies to any taxpayer that wants to:

(i) change from the LIFO inventory method for all its LIFO inventory or for a pool or pools within 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 .

2002–3 I.R.B. 368 January 22, 2002

(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 5.04(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. 2002–9 because [explain in detail how the new method conforms to the specific subdivision].”

.02 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).

(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 all of its non-LIFO inventory, including the inventory that is the subject of this accounting method change.

(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 “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 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, Appli- cation 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.

January 22, 2002 369 2002–3 I.R.B.

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

.03 Alternative LIFO inventory method for retail automobile dealers .

(1) Description of change and scope .

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 Used vehicle alternative LIFO method .

(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.

(1) Description of change and scope .

and compute a § 481(a) adjustment for that part of the change (see Announcement 91–173, 1991–47 I.R.B. 29).

(b) New base year . In effecting a change to the Used Vehicle Alternative LIFO Method under this revenue procedure, any LIFO inventory cost increments previously determined and the value of those increments must be retained. Instead of using the earliest taxable year for which the taxpayer adopted LIFO as the base year, the year of change must be used as the new base year in determining the value of all existing LIFO cost increments for the year of change and later taxable years. (The cumulative index at the beginning of the year of change will be 1.00.) The base-year cost of all LIFO cost increments at the beginning of the year of change must be restated in terms of new base-year costs, using the year of change as the new base year, and the indexes for previously determined inventory increments must be recomputed accordingly. The new base-year cost of a pool is equal to the total current-year cost of all the vehicles in the pool.

(c) When filing their applications, taxpayers are reminded to complete all applicable parts of the Form 3115, including Part I of Schedule B.

(5) Concurrent change available for certain IPIC taxpayers . A used vehicle dealer using the IPIC method that also has parts and accessories, new automobiles, or new light-duty trucks in inventory may incorporate a change, using a cut-off method, from IPIC to another acceptable LIFO method for these other goods into this change. When changing from IPIC to a dollar-value LIFO method for parts and accessories, new automobiles, or new light-duty trucks, a separate inventory pool must be established for each of these types of inventory.

.05 Determining the cost of used vehicles purchased or taken as a trade-in .

(2) Manner of making the change .

(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

(a) Applicability . This change applies to a taxpayer that sells used automobiles and used light-duty trucks (“used vehicle dealers”) that wishes to change to the “Used Vehicle Alternative LIFO Method” as described in Rev. Proc. 2001–23 (2001–10 I.R.B. 784). (b) Inapplicability . This change does not apply to used vehicle dealers that use the IPIC method and have in inventory goods other than new or used automobiles, new or used light duty trucks, and parts and accessories. See section 5.03(2) of Rev. Proc. 2001–23.

(2) Additional requirements . A taxpayer making this change must comply with the additional conditions set forth in section 5.04 of Rev. Proc. 2001–23.

(3) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to this change, provided that the change is made for the first or second taxable year ending on or after December 31, 2000, unless the taxpayer’s method of valuing its LIFO inventories of used automobiles or used light-duty trucks is an issue pending within the meaning of section 6.01(6) of Rev. Proc. 2000–38 (2000–40 I.R.B. 310). (4) Manner of making change .

(a) Cut-off method . This change must be effected on a cut-off method, which requires that the value of the taxpayer’s used automobile and used lightduty truck inventory at the beginning of the year of change must be the same as the value of that inventory at the end of the preceding taxable year, plus cost restorations, if any, required by section 5.04(5) of Rev. Proc. 2001–23. However, if the taxpayer has previously improperly accounted for a bulk bargain purchase, the taxpayer, as part of a change to the Used Vehicle Alternative LIFO Method, must first change its method of accounting to comply with Hamilton Industries, Inc. v. Commissioner, 97 T.C. 120 (1991),

(1) Description of change and scope .

(a) Applicability . This change applies to a LIFO taxpayer that wants to:

(i) 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;

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

(iii) 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.

(b) Inapplicability . This change does not apply to taxpayers that have adopted or changed to the Used Vehicle Alternative LIFO Method ( see section 10.06 of the APPENDIX of this revenue procedure).

(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.

.06 Change to inventory price index computation (IPIC) method .

(1) Description of change and scope .

(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 comply with Hamilton Industries, Inc. v. Commis- sioner, 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 .

.07 Changes within inventory price index computation (IPIC) method .

(1) Description of change and scope . This change applies to a taxpayer that wants to make one or more of the following changes:

(a) change from the doubleextension IPIC method to the link-chain IPIC method, or vice versa. See §§ 1.472–8(e)(3)(iii)(E) for principles for computing the inventory price index under the double-extension IPIC method and the link-chain IPIC method;

(b) change to or from the 10 percent method. See § 1.472–8(e)(3)(iii)(C) for principles for assigning items in a dollarvalue pool to BLS categories;

(c) change to a pooling method described in § 1.472–8(b)(4) or § 1.472– 8(c)(2), including a change to begin or discontinue applying one or both of the 5 percent pooling rules;

(d) combine or separate pools as a result of the application of a 5 percent pooling rule described in § 1.472–8(b)(4) or § 1.472–8(c)(2);

(e) change its selection of BLS table from Table 3 (Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, detailed expenditure categories) of the monthly CPI Detailed Report to Table 6 (Producer price indexes and percent changes for commodity groupings and individual items, not seasonally adjusted) of the monthly PPI Detailed

Report, or vice versa. See § 1.472– 8(e)(3)(iii)(B) for principles for selecting a BLS table under the IPIC method; or

(f) change the representative month when necessitated because of a change in taxable year or a change in method of determining current-year cost made pursuant to section 10.02 of this APPENDIX. See § 1.472–8(e)(3)(iii)(B) for principles for determining a representative month under the IPIC method. A change in method of determining current-year cost and a change of the representative month may be made using a single application, provided the application is labeled as being filed under both sections 10.02 and 10.07 of this APPENDIX. See section 6.02(4) of this revenue procedure. (2) Manner of making the change . Changes made pursuant to section 10.07 of this APPENDIX are made using a cutoff method. See section 2.06 of this revenue procedure. A taxpayer that changes pursuant to sections 10.07(a), (b) and (e) of this APPENDIX must establish a new base year in the year of change.

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

.01 Reserved . .02 Commodities dealers, securities traders, and commodities traders electing to use the mark-to-market method of accounting 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, 1999–1 C.B. 503, if a taxpayer makes an election under § 475(e) or (f), 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.

(a) This change applies to a taxpayer that wants to change from a nonIPIC LIFO inventory method to the IPIC method in accordance with all relevant provisions of § 1.472–8(e)(3).

(b) A taxpayer may change its method of determining current-year cost as part of a change made under section 10.06 of this APPENDIX by also following the provisions of section 10.02 of this APPENDIX. These changes may be made using a single application, provided the application is labeled as being filed under both sections 10.02 and 10.06 of this APPENDIX. See section 6.02(4) of this revenue procedure.

(c) A taxpayer may change its method of pooling to a method permitted under § 1.472–8(b)(4) or § 1.472–8(c)(2) as part of a change made under section 10.06 of this APPENDIX by also following the provisions of section 10.07 of this APPENDIX. These changes may be made using a single application, provided the application is labeled as being filed under both sections 10.06 and 10.07 of this APPENDIX. See section 6.02(4) 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.

January 22, 2002 371 2002–3 I.R.B.

§ 1.861–18(i)(2)(ii), to transactions occurring pursuant to contracts entered into in taxable years ending on or after October 2, 1998.

.02 Reserved .

SECTION 11B. FUNCTIONAL CURRENCY (§ 985)

(2) Scope

(a) Applicability . This change applies to a taxpayer if all of the following conditions are satisfied:

(i) The taxpayer is a commodities dealer, securities trader, or commodities trader that has made a valid election under § 475(e) or (f) ( see section 5.02 or 5.03(1) of Rev. Proc. 99–17) and that is required to change its method of accounting to comply with the election;

(ii) The method of accounting to which the taxpayer changes is in accordance with its election under § 475(e) or (f); and

(iii) The year of change is the election year.

(b) Scope limitations inapplicable . A taxpayer making this change is not subject to the scope limitations in section 4.02 of this revenue procedure.