Rev. Rul. 76-379

Advice has been requested whether a taxpayer that uses the last-in, first-out (LIFO) inventory method may change to the full absorption method of costing its LIFO inventory under section 1.471-11 of the Income Tax Regulations for tax purposes and continue to report the value of its inventories for other purposes in the manner indicated below, without violating the conformity requirements of section 472(c) and (e) of the Internal Revenue Code of 1954.

The taxpayer employs the LIFO inventory method for Federal income tax purposes and in all reports of income to shareholders, partners, other proprietors, beneficiaries and for credit purposes. Inventory increments are priced based on the earliest acquisition costs during the year. In past years, the taxpayer has consistently used a more inclusive method than required under section 1.471-11(a) of the regulations in determining inventoriable costs. Specifically, the taxpayer has treated pension contributions representing past service costs as inventoriable costs. Under section 1.471-11(c)(2)(ii)(k), such costs are not required to be included with inventoriable costs under the full absorption method for Federal income tax purposes, regardless of their treatment by a taxpayer in his financial statements. The taxpayer proposes to change its costing method for tax purposes to exclude such past service costs that are not required to be included under section 1.471-11(c)(2)(ii)(k). The taxpayer will comply with all requirements to obtain permission to make the transition to the full absorption method of inventory costing in accordance with section 1.471-11(e)(4)(i). However, the taxpayer contends that it should not be required to make such a change for financial statement purposes, since it is not using a method other than the LIFO inventory method in its financial statements.

Section 472(b)(1) of the Code provides that goods in the ending inventory shall be treated as composed first of goods included in the opening inventory (in the order of acquisition) to the extent thereof and then of goods acquired in the taxable year. Section 472(b)(3) provides that goods in the opening inventory for the taxable year of adoption shall be treated as having been acquired at the same time and their costs determined under the average cost method. Section 472(b)(2) requires a taxpayer to value its inventory at cost.

Section 472(c) of the Code provides that a taxpayer must not have used any procedure other than that specified in sections 472(b)(1) and (3) in inventorying goods included within the LIFO election to ascertain the income, profit, or loss for the first taxable year for the purpose of a report or statement to shareholders, proprietors, beneficiaries, or creditors. Section 472(e)(2), which refers only to section 472(b)(1), imposes a similar requirement for inventorying goods included within the election for subsequent taxable years and provides that the Secretary of the Treasury or the Secretary's delegate may require a change to a different method if such requirement is not met.

Section 1.471-11(e)(1)(i) of the regulations provides, in part, that a taxpayer not using the full absorption method of inventory costing as prescribed in section 1.471-11(a) must change to that method. The full absorption method is a method of determining the cost of the inventory, while the LIFO method is a method of carrying the inventory at cost.

Section 1.471-11(c)(3)(ii) of the regulations provides rules that may result in differences between the cost of inventoriable goods on the taxpayer's financial statements and the cost of the same goods under the full absorption method for Federal income tax purposes. Such rules are consistent with section 472(c) and (e) of the Code.

The conformity requirements of section 472 of the Code state that a taxpayer using the LIFO inventory method for Federal income tax purposes may not use a method other than the LIFO method for financial reporting or other purposes. The taxpayer's change of its costing method for tax purposes to exclude past service costs under section 1.471-11(c)(2)(ii)(k) of the regulations does not affect the sequential layering provisions of section 472(b)(1) and (3), and therefore does not result in the use of a method other than the LIFO method, nor is its use inconsistent with the use of the LIFO method.

Accordingly, in the instant case, the taxpayer will be permitted to change to the full absorption method of costing its LIFO inventory for Federal income tax purposes and to continue to value its LIFO inventories for financial statement purposes in a manner different from its tax reporting method without violating the conformity requirements of section 472(c) and (e) of the Code.