SECTION 21. INVENTORIES — Internal Revenue Bulletin 2011-4

.01 Cash discounts . (1) Description of change . This change applies to a taxpayer that wants to change its method of accounting for cash discounts (discounts granted for timely payment) when they approximate a fair interest rate, from a method of consistently including the price of the goods before discount in the cost of the goods and including in gross income any discounts taken (the “gross invoice method”), to a method of reducing the cost of the goods by the cash discounts and deducting as an expense any discounts not taken (the “net invoice method”), or vice versa . See Rev. Rul. 73–65, 1973–1 C.B. 216.

(2) Computation of § 481(a) adjustment for changes to net invoice method . In the case of a taxpayer changing from the gross invoice method to the net invoice method, a negative adjustment is required to prevent duplications arising from the fact that the gross invoice method reported income upon timely payment for some or all of the goods that remain in inventory, and a positive adjustment is required to prevent omissions arising from the fact that the gross invoice method included the invoice price, unadjusted for the cash discounts, of some or all goods in cost of goods sold and the discount will be earned by payment in a subsequent taxable year. The net § 481(a) adjustment can be computed by deducting the “Applicable Discount” at the beginning of the year of change from the “Available Discount” at the beginning of the year of change. The Available Discount is equal to the difference between the accounts payable balance under the gross invoice method and the net in

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may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(5) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.03 of this APPENDIX for the small taxpayer ($1 million) inventory exception contained in Rev. Proc. 2001–10 is “50.” The designated automatic accounting method change number for a change under section 21.03 of this APPENDIX for the small taxpayer ($10 million) inventory exception contained in Rev. Proc. 2002–28 is “51.” See section 6.02(4) of this revenue procedure.

(6) Contact information . For further information regarding a change under this section, contact Kari Fisher, at 202–622–4970 (not a toll-free call). .04 Qualifying volume-related trade discounts .

(1) Description of change . This change applies to a taxpayer that wants to change its method of accounting to treat qualifying volume-related trade discounts as a reduction in the cost of merchandise purchased at the time the discount is recognized in accordance with § 1.471–3(b). A “qualifying volume-related trade discount” means a discount satisfying the following criteria:

(a) the taxpayer receives or earns the discount based solely upon the purchase of a particular volume of the merchandise to which the discount relates;

(b) the taxpayer is neither obligated nor expected to perform or provide any services in exchange for the discount; and

(2) Section 481(a) adjustment . The net § 481(a) adjustment attributable to the change is computed in a manner similar to the computation of a net § 481(a) adjustment in the case of a change to the net invoice method of accounting for cash discounts. See section 21.01(2) of this APPENDIX.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.04 of this APPENDIX is “53.” See section 6.02(4) of this revenue procedure.

der this section, contact Patty Ward at 202–622–4970 (not a toll-free call). .02 Estimating inventory “shrinkage” . (1) Description of change . This change applies to a taxpayer that wants to change to a method of accounting for estimating inventory shrinkage in computing ending inventory, using:

(a) the “retail safe harbor method” described in section 4 of Rev. Proc. 98–29, 1998–1 C.B. 857; or (b) a method other than the retail safe harbor method, provided (i) the taxpayer’s present method of accounting does not estimate inventory shrinkage, and (ii) the taxpayer’s new method of accounting (that estimates inventory shrinkage) clearly reflects income under § 446(b).

(2) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to this change.

(3) Additional requirements . If the taxpayer wants to change to a method of accounting for inventory shrinkage other than the retail safe harbor method, the taxpayer must attach to its Form 3115 a statement setting forth a detailed description of all aspects of the new method of estimating inventory shrinkage (including, for last-in, first-out (LIFO) taxpayers, the method of determining inventory shrinkage for, or allocating inventory shrinkage to, each LIFO pool).

(4) Audit protection . A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with a change to the retail safe harbor method if, on the date the taxpayer files a copy of the Form 3115 with the national office, the taxpayer’s present method of estimating inventory shrinkage is an issue under consideration within the meaning of section 3.09 of this revenue procedure.

(5) Future change . A taxpayer that changes to the retail safe harbor method described in Rev. Proc. 98–29 will not be precluded, solely by reason of such change, from changing to another safe harbor method for estimating inventory shrinkage in computing ending inventory in the first year such other safe harbor method is available.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.02

of this APPENDIX is “49.” See section 6.02(4) of this revenue procedure. (7) Contact information . For further information regarding a change under this section, contact Steven Gee at 202–622–4970 (not a toll-free call). .03 Small taxpayer exception from requirement to account for inventories under § 471 .

(1) Description of change . This change applies to either a taxpayer (other than a taxpayer described § 448(a)(3)) with “average annual gross receipts” (as defined in section 5.01 of Rev. Proc. 2001–10, as modified by Announcement 2004–16 and Rev. Proc. 2011–14) of $1,000,000 or less or a qualifying taxpayer (other than a taxpayer described in § 448) with “average annual gross receipts” (as defined in section 5.02 of Rev. Proc. 2002–28, as modified by Announcement 2004–16 and Rev. Proc. 2011–14) of $10,000,000 or less that wants to change from a method of accounting for inventoriable items (including, if applicable, from the method of capitalizing costs under § 263A) to the method described in Rev. Proc. 2001–10 and Rev. Proc. 2002–28, for treating inventoriable items in the same manner as materials and supplies that are not incidental under § 1.162–3.

(2) Scope limitations applicable . The scope limitations in section 4.02 of this revenue procedure (including the limitation regarding a prior change within five taxable years of section 4.02(6)) and the requirements in sections 6.03 (regarding taxpayers under examination), 6.04 (regarding taxpayers before an appeals office) and 6.05 (regarding taxpayers before a federal court) of this revenue procedure apply to a change in method of accounting made under this section 21.03 of the APPENDIX. See sections 14.05 and 14.06 of Rev. Proc. 2011–14. (3) Manner of making change . See Rev. Proc. 2001–10 or Rev. Proc. 2002–28 (as applicable) for additional guidance on the computation of the § 481(a) adjustment and the completion of the Form 3115.

(4) Concurrent automatic change to the overall cash method under Rev. Proc. 2001–10 or Rev. Proc. 2002–28 . A taxpayer that wants to make both this change and a change to the overall cash method under Rev. Proc. 2001–10 or Rev. Proc. 2002–28 ( see section 14.03 of this APPENDIX) for the same year of change

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.07 Replacement cost for automobile dealers’ parts inventory .

(1) Description of change . This change applies to a taxpayer that is engaged in the trade or business of selling vehicle parts at retail, that is authorized under an agreement with one or more vehicle manufacturers or distributors to sell new automobiles or new light, medium, or heavy-duty trucks, and that wants to use the replacement cost method described in section 4 of Rev. Proc. 2002–17, 2002–1 C.B. 676, for its vehicle parts inventory. See Rev. Proc. 2002–17 for further information regarding this change.

(2) Manner of making change . This change is made on a cut-off basis and applies only to the computation of ending inventories on or after the beginning of the year of change. See section 2.06 of this revenue procedure for more information regarding a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.07 of this APPENDIX is “63.” See section 6.02(4) of this revenue procedure. (4) Contact information . For further information regarding a change under this section, contact Eric D. Brauer at 202–622–4970 (not a toll-free call). .08 Replacement cost for heavy equipment dealers’ parts inventory .

(1) Description of change . This change applies to a heavy equipment dealer that is engaged in the trade or business of selling heavy equipment parts at retail, that is authorized under an agreement with one or more heavy equipment manufacturers or distributors to sell new heavy equipment, and that wants to use the replacement cost method described in section 4 of Rev. Proc. 2006–14, 2006–1 C.B. 350, for its heavy equipment parts inventory.

(2) Manner of making the change . This change is made on a cut-off basis and applies only to the computation of ending inventories after the beginning of the year of change. See section 2.06 of this revenue procedure for more information regarding a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(3) Concurrent automatic change . A taxpayer that wants to make both this change and another automatic change in

(4) Contact information . For further information regarding a change under this section, contact Patty Ward at 202–622–4970 (not a toll-free call). .05 Impermissible methods of identification and valuation .

(1) Description of change . This change applies to a taxpayer:

(a) changing from an impermissible method of accounting described in §§ 1.471–2(f)(1) through (5), including a LIFO taxpayer restoring a write down of inventory below cost or discontinuing maintaining an inventory reserve;

(b) changing from a gross profit method or from a method of determining market that is not in accordance with § 1.471–4; or

(i) Gross profit method . A gross profit method is a method in which the taxpayer estimates the cost of goods sold by reducing its gross sales by a percentage “markup” from cost. The estimated cost of goods sold is subtracted from the sum of the beginning inventory and purchases and the result is used as the ending inventory.

(ii) Method of determining market . An example of a method of determining market that is not in accordance with § 1.471–4 is where a taxpayer, under ordinary circumstances, determines the market value of purchased merchandise using judgment factors, and not using the prevailing current bid price on the inventory date for the particular merchandise in the volume in which it is usually purchased by the taxpayer.

(2) Applicability . For purposes of this change, a taxpayer must be changing to an inventory method (identification or valuation, or both) specifically permitted by the Code, the regulations, or a decision of the United States Supreme Court, a revenue ruling, a revenue procedure, or other guidance published in the IRB for the inventory goods, and the taxpayer is neither prohibited from using that method nor required to use a different inventory method for those inventory goods. This change does not apply to a change described in another section of this revenue procedure or in other guidance published in the IRB.

(3) Designated automatic accounting method change number . The designated automatic accounting method change

number for a change under section 21.05 of this APPENDIX is “54.” See section 6.02(4) of this revenue procedure. (4) Contact information . For further information regarding a change under this section, contact Patty Ward at 202–622–4970 (not a toll-free call). .06 Core Alternative Valuation Method . (1) Description of change . (a) Applicability . This change applies to a remanufacturer and rebuilder of motor vehicle parts and a reseller of remanufactured and rebuilt motor vehicle parts that use the cost or market, whichever is lower, (LCM) inventory valuation method to value their inventory of cores held for remanufacturing or sale and wants to use the Core Alternative Valuation (CAV) method specified in Rev. Proc. 2003–20, 2003–1 C.B. 445. (b) Inapplicability . This change does not apply to a taxpayer that values its inventory of cores at cost (including a taxpayer using the LIFO inventory method) unless the taxpayer concurrently changes (under section 6.02 of Rev. Proc. 2003–20) from cost to the LCM method for its cores (including labor and overhead related to the cores in raw materials, work-in-process and finished goods).

(2) Concurrent automatic change . A taxpayer that wants to make both this change and (i) a change from the cost method to the LCM method under section 21.11 of this APPENDIX, or (ii) a change from the LIFO inventory method to a permitted method for identification under (and as determined and defined in) section 22.01(1)(b) of this APPENDIX for the same year of change, should file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.06 of this APPENDIX is “55.” See section 6.02(4) of this revenue procedure. (4) Contact information . For further information regarding a change under this section, contact Eric D. Brauer at 202–622–4970 (not a toll-free call).

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ample, this change does not apply to a taxpayer that wants to change to a rolling-average method ( see section 21.14 of this APPENDIX).

(b) Permissible method defined . For purposes of this change, a permissible method is an inventory method (identification or valuation, or both) specifically permitted by the Code, the regulations, a decision of the United States Supreme Court, a revenue ruling, a revenue procedure, or other guidance published in the IRB for inventories. However, an otherwise permissible inventory method is not permissible under this section 21.11 of the APPENDIX of this revenue procedure for a specific taxpayer if that taxpayer is prohibited from using that method or if that taxpayer is required to use a different method.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.11 of this APPENDIX is “137.” See section 6.02(4) of this revenue procedure. (3) Contact information . For further information regarding a change under this section, contact Patty Ward at 202–622–4970 (not a toll-free call). .12 Change in the official used vehicle guide utilized in valuing used vehicles .

(1) Description of change . Used vehicles taken in trade as part payment on the sale of vehicles by a dealer may be valued for inventory purposes at valuations comparable to those listed in an official used vehicle guide as the average wholesale prices for comparable vehicles. See Rev. Rul. 67–107, 1967–1 C.B. 115. This change applies to: (a) a taxpayer that wants to change from not using an official used vehicle guide to using an official used vehicle guide for valuing used vehicles; or (b) a taxpayer that wants to change to a different official used vehicle guide for valuing used vehicles.

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.12 of this APPENDIX is “138.” See section 6.02(4) of this revenue procedure. (3) Contact information . For further information regarding a change under this section, contact Patty Ward at 202–622–4970 (not a toll-free call).

method of accounting under § 263A ( see section 11 of this APPENDIX) for the same year of change may file a single Form 3115 for both changes, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115, and complies with the ordering rules of § 1.263A–7(b)(2).

(4) Designated automatic accounting method change number . The taxpayer must prepare and file a Form 3115 in accordance with section 6 of Rev. Proc. 2006–14. The designated automatic accounting method change number for a change under section 21.08 of this APPENDIX is “96.” See section 6.02(4) of this revenue procedure.

(5) Contact information . For further information regarding a change under this section, contact Eric D. Brauer at 202–622–4970 (not a toll-free call). .09 Rotable spare parts . (1) Description of change . This change applies to a taxpayer that is using the safe harbor method of accounting to treat its rotable spare parts as depreciable assets in accordance with Rev. Proc. 2007–48, 2007–2 C.B. 110, and wants to change its method of accounting to treat its rotable spare parts as inventoriable items. This change also applies to a taxpayer who is treating its rotable spare parts as depreciable assets in a manner similar to the safe harbor method described in Rev. Proc. 2007–48, and wants to change its method of accounting to treat its rotable spare parts as inventoriable items. A taxpayer changing its method of accounting for rotable spare parts under this section 21.09 of the APPENDIX, must use a proper inventory method to identify and value its rotable spare parts.

(2) Scope limitations inapplicable . The scope limitations in section 4.02 of this revenue procedure do not apply to a taxpayer that is required to make the change in method of accounting pursuant to section 5.06 of Rev. Proc. 2007–48.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.09 of this APPENDIX is “110.” See section 6.02(4) of this revenue procedure. (4) Contact information . For further information regarding a change under

this section, contact Gwen Turner at 202–622–5020 (not a toll-free call). .10 Advance Trade Discount Method . (1) Description of change . This change applies to a taxpayer that wants to use the Advance Trade Discount Method described in Rev. Proc. 2007–53, 2007–2 C.B. 233.

(2) Scope . This change in method of accounting applies to an accrual method taxpayer required to use an inventory method of accounting and maintaining inventories, as provided in § 471 and the regulations thereunder, that receives advance trade discounts as defined in § 4.03 of Rev. Proc. 2007–53.

(3) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.10 of this APPENDIX is “111.” See section 6.02(4) of this revenue procedure. (4) Contact information . For further information regarding a change under this section, contact Eric D. Brauer, at 202–622–4970 (not a toll-free call). .11 Permissible methods of identification and valuation .

(1) Description of change . (a) Applicability . This change applies to a taxpayer that wants to change from one permissible method of identifying and valuing inventories to another permissible method of identifying and valuing inventories. For example, a taxpayer using first-in, first-out (FIFO) as its inventory-identification method may change its inventory-valuation method from cost to cost or market, whichever is lower (LCM). (Note, however, a real estate developer may not value real property or improvements to the real property at LCM because real property is not inventoriable property under § 1.471–1. Also, a taxpayer who meets the definition of a “dealer in securities” under both § 1.471–5 and § 475 is required to account for securities, as defined in § 475, under § 475 and may not use the rules described in § 1.471–5 for those securities.) Furthermore, a taxpayer may change to a permissible method of valuing “subnormal” goods under § 1.471–2(c).

However, this change does not apply to any change described in another section of the APPENDIX of this revenue procedure or in other guidance published in the IRB, or to any changes within the last-in, first-out (LIFO) inventory method. For ex

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lished in the IRB for the inventory goods and if the taxpayer is neither prohibited from using that method nor required to use a different inventory method for those inventory goods.

(iii) Determining permitted method . Whether an inventory method is a permitted method is determined without regard to the types and amounts of costs 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) Certain scope limitation inapplica- ble . The scope limitation in section 4.02(7) of this revenue procedure does not apply in the first taxable year that the taxpayer does not or will not comply with the requirements of § 472(e)(2) because the taxpayer has applied or will apply International Financial Reporting Standards in its financial statements or because the taxpayer has been acquired by an entity that has not or will not use the LIFO method in its financial statements.

(3) 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 (or any successor). 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.

(4) 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

.13 Invoiced advertising association costs for new vehicle retail dealerships .

(1) Description of change . This change applies to a taxpayer that is engaged in the trade or business of retail sales of new automobiles or new light-duty trucks (“dealership”) that wants to discontinue capitalizing certain advertising costs as acquisition costs under § 1.471–3(b). The change applies to advertising costs that meet the following criteria: (a) the dealership must pay this advertising fee when acquiring vehicles from the manufacturer; (b) the advertising costs are separately coded and included in the manufacturer’s invoice cost of the new vehicle; (c) the advertising cost is a flat fee per vehicle or a fixed percentage of the invoice price; and (d) the fees collected by the manufacturer are paid to local advertising associations that promote and advertise the manufacturer’s products in the dealership’s market area. Under the new method, the dealership will exclude advertising costs that meet the above criteria from the cost of new vehicles and deduct the advertising costs under § 162 as the advertising services are provided to the dealership. See § 1.461–4(d)(2)(i).

(2) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.13 of this APPENDIX is “139.” See section 6.02(4) of this revenue procedure. (3) Contact information . For further information regarding a change under this section, contact Patty Ward at 202–622–4970 (not a toll-free call). .14 Rolling-average method of accounting for inventories .

(1) Description of change . This change applies to a taxpayer that uses a rollingaverage method to value inventories for financial accounting purposes and wants to use the same rolling-average method to value inventories for federal income tax purposes in accordance with Rev. Proc. 2008–43, 2008–30 I.R.B. 186, as modified by Rev. Proc. 2008–52 ( see section 13).

(2) Certain scope limitation temporar- ily inapplicable . The scope limitation in section 4.02(7) of this revenue procedure does not apply to the change to a rollingaverage method in the taxpayer’s first or second taxable year ending on or after December 31, 2007.

(3) Manner of making change . This change is made on a cut-off basis unless

the taxpayer’s books and records contain sufficient information to compute a § 481(a) adjustment, in which case the taxpayer may choose to implement the change with a § 481(a) adjustment as provided in section 5.04 of this revenue procedure. See section 2.06 of this revenue procedure for more information regarding a cut-off basis.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 21.14 of this APPENDIX is “114.” See section 6.02(4) of this revenue procedure. (5) Contact information . For further information regarding a change under this section, contact Leo Nolan at 202–622–4970 (not a toll-free call).