SECTION 2. BACKGROUND

.01 Section 446(a) provides that taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes income in keeping its books.

.02 Sections 446(e) and 1.446–1(e)(2) of the Income Tax Regulations state that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting.

.03 Rev. Proc. 2002–9, 2002–1 C.B. 327 (as modified and clarified by Announcement 2002–17, 2002–1 C.B. 561, modified and amplified by Rev. Proc. 2002–19, 2002–1 C.B. 696, and amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–2 C.B. 432), provides procedures for a taxpayer to obtain automatic consent of the Commissioner to change to a method of accounting described in the Appendix of Rev. Proc. 2002–9.

.04 Section 471 provides that inventories must be taken on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting income.

.05 Section 1.471–2(c) permits merchants and manufacturers to value inventories at either (1) cost, or (2) cost or market, whichever is lower (LCM). When applying one of these valuation methods, a taxpayer uses a cost-flow assumption, such as first-in, first-out (FIFO) or last-in, first-out (LIFO), to identify the items in ending inventories.

.06 Section 472(a) provides that a taxpayer may use the LIFO inventory method. Under § 472(b)(2), a taxpayer using the LIFO inventory method must value its goods at cost.

.07 Section 1.471–3(b) defines the cost of merchandise purchased since the beginning of the taxable year as the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate, which a taxpayer may or may not deduct at the taxpayer’s option, provided

July 28, 2008 186 2008–30 I.R.B.