Rev. Rul. 78-262

Advice has been requested whether, under the circumstances described below, the taxpayer has made a valid election to use the last-in, first-out (LIFO) inventory method.

The taxpayer, a domestic corporation, computes its income under an accrual method of accounting on a fiscal year ending March 31. For its taxable year ending March 31, 1976, the taxpayer proposed to elect to use the LIFO inventory method of accounting described in section 472 of the Internal Revenue Code of 1954. The taxpayer indicated on its Federal income tax return filed for that year that it had substantially changed its method of valuing its inventory. The taxpayer did not file a Form 970, Application to use LIFO Inventory Method, with its 1976 Federal income tax return and did not supply in any other manner the information required under section 1.472-3(a) of the Income Tax Regulations, including the information required in the instructions on Form 970.

The taxpayer's financial report for the fiscal year ended March 31, 1976, indicated that it had changed its method of determining the cost for parts in inventory from the lower of cost or market to the LIFO basis by using the LIFO reserve method.

Section 1.472-3(a) of the regulations provides, in part, that the LIFO inventory method may be adopted and used only if the taxpayer files with the income tax return for the taxable year as of the close of which the method is first to be used a statement of the election to use such inventory method. The statement shall be made on Form 970 pursuant to the instructions printed with respect thereto and to the requirements of this section, or in such other manner as may be acceptable to the Commissioner of Internal Revenue. Such statement shall be accompanied by an analysis of all inventories of the taxpayer as of the beginning and as of the end of the taxable year for which the LIFO inventory method is proposed first to be used, and also as of the beginning of the prior taxable year.

Rev. Proc. 74-2, 1974-1 C.B. 412, provides a procedure whereby an election to use the LIFO inventory method will be considered acceptable, even though Form 970 has not been filed with the Federal income tax return. A Form 970 will not be needed if all the information required on, or to be filed with, Form 970 is included in the taxpayer's timely filed Federal income tax return for the taxable year as of the close of which the LIFO method is first to be used.

The statement made by the taxpayer on its Federal income tax return for its taxable year ended March 31, 1976, does not comply with the requirements of section 1.472-3(a) of the regulations or Rev. Proc. 74-2 for the taxable year in which the LIFO inventory method was first used.

Accordingly, the taxpayer's statement made on its Federal income tax return filed for its taxable year ended March 31, 1976, is not considered a valid LIFO election.