SECTION 22. LAST-IN — Internal Revenue Bulletin 2011-4

(LIFO) INVENTORIES (§ 472)

.01 Change from the LIFO inventory method .

(1) Description of change . (a) In general . This change applies to a taxpayer that wants to:

(i) change from the LIFO inventory method for all its LIFO inventory or for the entire content of one or more dollar-value pools; and

(ii) change to a permitted method or methods as determined in section 22.01(1)(b) of this APPENDIX. (b) Method to be used . (i) Determining the permitted method to be used . A taxpayer may change to one or more non-LIFO inventory methods for the LIFO inventories that are the subject of this accounting method change, but only if the selected non-LIFO method is a permitted method for the inventory goods to which it will be applied. For example, a heavy equipment dealer may change to the specific identification method for new heavy equipment inventories and the replacement cost method, as described in Rev. Proc. 2006–14, 2006–1 C.B. 350, for heavy equipment parts inventories.

(ii) Permitted method defined . For purposes of section 22.01 of this APPENDIX, an inventory method (identification or valuation, or both) is a permitted method if it is specifically permitted by the Code, the regulations, a decision of the United States Supreme Court, a revenue ruling, a revenue procedure, or other guidance pub

January 24, 2011 411 2011–4 I.R.B.

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);

(iv) the specific identification method; or

(v) a rolling-average method if the taxpayer uses that rolling-average method in accordance with Rev. Proc. 2008–43, 2008–30 I.R.B. 186, as modified by Rev. Proc. 2008–52 ( see section 13).

(b) Inapplicability . This change does not apply to a taxpayer using the lower of cost or market method to determine current-year cost. A taxpayer using the lower of cost or market method that valued inventory below cost may not change to a proper cost valuation under this section 22.02 of the APPENDIX. (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 using a cut-off basis and applies only to the computations of current-year cost 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.

(4) Concurrent change to a rolling-av- erage method . A taxpayer that wants to make both a change to a rolling-average method of determining current-year cost for its LIFO inventory under this section 22.02 of the APPENDIX and a change to a rolling-average method of accounting for non-LIFO inventories under Rev. Proc. 2008–43 ( see section 21.14 of this APPENDIX) should file a single Form 3115 for both changes, in which case the taxpayer must enter 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 22.02 of this APPENDIX is “57.” See section 6.02(4) of this revenue procedure. (6) Contact information . For further information regarding a change un

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 inventory method by the corporation.

(b) S election effective for a year af- ter 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.

(5) Additional requirements . The taxpayer must complete the following statements and attach them to its Form 3115. If the taxpayer will use different methods for different inventory goods to which the change applies, the taxpayer must complete the statements for each of those different types of inventory goods.

(a) “The new method of identifying [ In- sert description of inventory goods ] is the

[ Insert method, as appropriate; that is, specific identification; FIFO; retail; etc. ] method.”

(b) “The new method of valuing [ In- sert description of inventory goods ] is [ In- sert method, as appropriate; that is, cost; LCM; etc. ].”

(6) Pool split and partial termination . If a taxpayer must remove goods from a pool because those goods are not within the scope of that pool ( for example, re

moving resale goods from a manufacturing pool), and if the taxpayer wants to change from the LIFO inventory method for those removed goods, the taxpayer may split the pool pursuant to section 22.10 of this APPENDIX and then may change from the LIFO method pursuant to section 22.01 of this APPENDIX. See section 22.10(2) of this APPENDIX. The taxpayer must file a separate Form 3115 for each such change.

(7) Section 481(a) adjustment required . (a) General rule . A taxpayer changing from a LIFO method must compute a section 481(a) adjustment for the year of change. See section 5.03 of this revenue procedure.

(b) Special rule for changes that would otherwise be implemented with a cutoff . If a taxpayer is changing from the LIFO method to a method that is implemented on a cut-off basis under another section of this revenue procedure ( see, e.g., sections 21.07, 21.08, and 21.14 of this APPENDIX), the taxpayer’s § 481(a) adjustment is “the LIFO recapture amount” as defined in § 312(n)(4)(B) and (C). A taxpayer computing the § 481(a) adjustment under this special rule must then compute its ending inventory value for the year of change using the new method ( i.e., treat the deemed change from the FIFO method to the new method on a cut-off basis).

(8) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 22.01 of this APPENDIX is “56.” See section 6.02(4) of this revenue procedure. (9) Contact information . For further information regarding a change under this section, contact Leo Nolan at 202–622–4970 (not a toll-free call). .02 Determining current-year cost under the LIFO inventory method .

(1) Description of change . (a) Applicability . This change applies to a taxpayer using the LIFO inventory method that wants to change its method of determining current-year cost to:

(i) the actual cost of the goods most recently purchased or produced (most-recent-acquisitions method);

(ii) the actual cost of the goods purchased or produced during the taxable year in the order of acquisition (earliest-acquisitions method);

(iii) the average unit cost equal to the aggregate actual cost of all the goods

2011–4 I.R.B. 412 January 24, 2011

cost restorations, if any, required by section 5.04(5) of Rev. Proc. 2001–23. 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.

(b) 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 22.04 of this APPENDIX except for complying with section 22.04(3)(b) 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 .

(c) 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.

(d) Application . Taxpayers are reminded to complete all applicable parts of the Form 3115, including Part I of Schedule C.

der this section, contact Leo Nolan at 202–622–4970 (not a toll-free call). .03 Alternative LIFO inventory method for retail automobile dealers .

(1) Description of change . (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, as modified by Rev. Proc. 2008–23, 2008–1 C.B. 664, 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 change . (a) Cut-off basis . This change is made using 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 and section 5.03(6) of Rev. Proc. 97–36 for more information regarding a cut-off basis. Accordingly, a § 481(a) adjustment is neither permitted nor required.

(b) Concurrent change from IPIC method . An automobile dealer using the IPIC method that also has parts and accessories, used automobiles, or used light-duty trucks (other goods) inventory may incorporate a change, using a cut-off basis, from IPIC to another acceptable LIFO method for those other goods into this change. When changing from IPIC to a dollar-value LIFO method for its other goods, the automobile dealer must establish separate inventory pools for new automobiles and new light-duty trucks, unless the automobile dealer also concurrently changes to the Vehicle-Pool Method ( see section 22.08 of this APPENDIX). Further, the automobile dealer must establish a separate inventory pool for the parts and accessories.

(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 22.03 of this APPENDIX for each class of goods.

(3) Concurrent change to the Vehi- cle-Pool Method . A taxpayer that wants to make both a change to the Alternative LIFO Method under this section 22.03 of the APPENDIX and a change to the Vehicle-Pool Method under Rev. Proc. 2008–23 ( see section 22.08 of this APPENDIX) should file a single Form 3115 for both changes, in which case the taxpayer must enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 22.03 of this APPENDIX is “58.” 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). .04 Used vehicle alternative LIFO method .

(1) Description of change . This change applies to a taxpayer that sells used automobiles and used light-duty trucks (“used vehicle dealers”) that wants to change to the “Used Vehicle Alternative LIFO Method” as described in Rev. Proc. 2001–23, 2001–1 C.B. 784, as modified by Announcement 2004–16, 2004–1 C.B. 668, and Rev. Proc. 2008–23, 2008–1 C.B. 664.

(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) Manner of making change . (a) Cut-off basis . This change is made on a cut-off basis, which requires that the value of the taxpayer’s used automobile and used light-duty 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

January 24, 2011 413 2011–4 I.R.B.

to compute an IPI for a dollar-value pool(s); and

(iii) from using a components-of-cost method to define inventory items to using a total-product-cost method to define inventory items.

(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 22.06 of this APPENDIX except for complying with section 22.06(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.

(4) Concurrent automatic changes . (a) A taxpayer that wants to make this change and to change its method of determining current-year cost under section 22.02 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.

(b) A taxpayer that wants to make this change and to change its method of pooling to IPIC-method pools described in § 1.472–8(b)(4) or § 1.472–8(c)(2) under section 22.07 of this APPENDIX for the same year of change may file a single Form 3115, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(4) Concurrent change from IPIC method . A used vehicle dealer using the IPIC method that also has parts and accessories, new automobiles, or new light-duty trucks (other goods) inventory may incorporate a change, using a cut-off basis, from IPIC to another acceptable LIFO method for those other goods into this change. When changing from IPIC to a dollar-value LIFO method for its other goods, the used vehicle dealer must establish separate inventory pools for new automobiles and new light-duty trucks, unless the used vehicle dealer also concurrently changes to the Vehicle-Pool Method ( see section 22.08 of this APPENDIX). Further, the used vehicle dealer must establish a separate inventory pool for the parts and accessories.

(5) Concurrent change to the Vehicle- Pool Method . A taxpayer that wants to make both a change to the Used Vehicle Alternative LIFO Method under this section 22.04 of the APPENDIX and a change to the Vehicle-Pool Method under Rev. Proc. 2008–23 ( see section 22.08 of this APPENDIX) should file a single Form 3115 for both changes, in which case the taxpayer must enter the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115.

(6) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 22.04 of this APPENDIX is “59.” See section 6.02(4) of this revenue procedure. (7) Contact information . For further information regarding a change under this section, contact Leo Nolan at 202–622–4970 (not a toll-free call). .05 Determining the cost of used vehicles purchased or taken as a trade-in .

(1) Description of change and scope . (a) Applicability . This change applies to a taxpayer using the LIFO inventory method that wants to:

(i) determine the cost of used vehicles acquired by trade-in using the average wholesale price listed by an official used vehicle guide on the date of the trade-in. See Rev. Rul. 67–107, 1967–1 C.B. 115. The official used vehicle guide selected must be consistently used unless the taxpayer receives permission to use a different guide;

(ii) use a different official used vehicle guide for determining the cost of used vehicles acquired by trade-in;

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

(iv) reconstruct the beginning-of-theyear 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 a taxpayer that adopted or changed to the Used Vehicle Alternative LIFO Method ( see section 22.04 of the APPENDIX of this revenue procedure).

(2) Manner of making change . This change is made on a cut-off basis and applies only to used vehicles acquired 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 22.05 of this APPENDIX is “60.” 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 Change to the inventory price index computation (IPIC) method .

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

(a) from a non-IPIC LIFO inventory method to the IPIC method in accordance with all relevant provisions of § 1.472–8(e)(3); or

(b) from the IPIC method as described in T.D. 7814, 1982–1 C.B. 84, (March 15, 1982) (the old IPIC method) to the IPIC method as described in T.D. 8976, 2002–1 C.B. 421, (January 8, 2002) (the new IPIC method), which includes the following required changes (if applicable):

(i) from using 80% of the inventory price index (IPI) to using 100% of the IPI to determine the base-year cost and dollar-value of a LIFO pool(s);

(ii) from using a weighted arithmetic mean to using a weighted harmonic mean

2011–4 I.R.B. 414 January 24, 2011

justment is neither permitted nor required. A taxpayer that changes pursuant to sections 22.07(1)(a), (b) and (e) of this APPENDIX must establish a new base year in the year of change.

(4) Designated automatic accounting method change number . The designated automatic accounting method change number for a change under section 22.07 of this APPENDIX is “62.” 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). .08 Changes to the Vehicle-Pool Method .

(1) Description of change . This change applies to a retail dealer or wholesale distributor (“reseller”) of cars and light-duty trucks that wants to change to the “Vehicle-Pool Method” as described in Rev. Proc. 2008–23, 2008–1 C.B. 664.

(2) Manner of making 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. A reseller that changes its method of pooling under Rev. Proc. 2008–23 and this section 22.08 of the APPENDIX must comply with § 1.472–8(g). Instead of using the earliest taxable year for which the reseller adopted the LIFO method for any items in a pool, the reseller must use the year of change as the base year when determining the LIFO value of that pool for the year of change and subsequent taxable years ( i.e., the cumulative index at the beginning of the year of change will be 1.00). The reseller must restate the base-year cost of all layers of increment in a pool at the beginning of the year of change in terms of new base-year cost. For an example of establishing a new base year, see § 1.472–8(e)(3)(iv)(B)( 1 )( ii ).

(3) Scope limitations temporarily inap- plicable . The scope limitation in section 4.02(7) of this revenue procedure does not apply for the reseller’s first taxable year ending on or after December 31, 2007.

(4) Concurrent change to the Alter- native LIFO Method or the Used Vehicle Alternative LIFO Method . A reseller that wants to make both a change to the

(c) A taxpayer that wants to make this change and to change its method of pooling under section 22.10 of this APPENDIX for the same year of change may file a single Form 3115, 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 22.06 of this APPENDIX is “61.” See section 6.02(4) of this revenue procedure. (6) Contact information . For further information regarding a change under this section, contact Leo Nolan at 202–622–4970 (not a toll-free call). .07 Changes within the inventory price index computation (IPIC) method .

(1) Description of change . This change applies to a taxpayer using the IPIC method described in § 1.472–8(e)(3) as revised by T.D. 8976, 2002–1 C.B. 421, (new IPIC method) that wants to make one or more of the following changes:

(a) change from the double-extension IPIC method to the link-chain IPIC method, or vice versa . See § 1.472–8(e)(3)(iii)(E) for principles concerning the computation of 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 concerning the assignment of inventory items to BLS categories under the IPIC method;

(c) change to IPIC-method pools 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) change to 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 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)(2) for

principles concerning the selection of a BLS table under the IPIC method;

(f) change the assignment of one or more inventory items to BLS categories under either Table 3 (Consumer Price Index for All Urban Consumers (CPI-U): U.S. City average, detailed expenditure categories) of the monthly CPI Detailed Report or Table 6 (Producer price indexes and percent changes for commodity groupings and individual items, not seasonally adjusted) of the monthly PPI Detailed Report. See § 1.472–8(e)(3)(iii)(C) for principles concerning the assignment of inventory items to BLS categories under the IPIC method. As part of this change, a taxpayer may separate a reassigned item from an inappropriate pool and combine the reassigned item with items in an appropriate pool. See § 1.472–8(g)(2) for principles concerning the manner of combining and separating dollar-value pools;

(g) 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 22.02 of this APPENDIX. See § 1.472–8(e)(3)(iii)(B) for principles concerning the determination of 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 Form 3115, provided the taxpayer enters the designated automatic accounting method change numbers for both changes on the appropriate line on that Form 3115. See section 6.02(4) of this revenue procedure; and

(h) change from using preliminary BLS price indexes to using final BLS price indexes to compute an inventory price index, or vice versa . See § 1.472–8(e)(3)(iii)(D)( 2 ) for principles concerning the selection of BLS price indexes under the IPIC method.

(2) Certain scope limitation inapplica- ble . The scope limitation in section 4.02(7) of this revenue procedure does not apply to the changes described in sections 22.07(1)(d) and (g) of this APPENDIX. (3) Manner of making change . These changes are made on a cut-off basis and apply 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) ad

January 24, 2011 415 2011–4 I.R.B.