Rev. Rul. 77-50
Rev. Rul. 77-50; 1977-1 C.B. 137
- Cross-Reference
26 CFR 1.472-2: Requirements incident to the adoption and use of LIFO
inventory method.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Obsoleted by Rev. Rul. 88-21
Advice has been requested concerning the application of the requirements of section 472(c) and (e) of the Internal Revenue Code of 1954, to the situation described below.
The taxpayer, a domestic corporation, elected the last-in, first-out (LIFO) inventory method, as described in section 472 of the Code, for its taxable year ended December 31, 1974. The taxpayer included certain subnormal goods, as described in section 1.471-2(c) of the Income Tax Regulations, in its LIFO election but valued such goods at less than actual cost for both Federal income tax purposes and financial reporting purposes. The taxpayer excluded other subnormal goods from the LIFO election. These goods were within the same class of goods as those with respect to which the LIFO election was made. During 1975 the taxpayer wrote down certain goods accounted for on the LIFO inventory method for both Federal income tax purposes and financial reporting purposes because such goods became unsalable at normal prices or unusable in the normal way. To the extent subnormal goods are on hand on January 1, 1977, the taxpayer must include all such subnormal goods in its LIFO inventory at actual cost for the taxable year which ended December 31, 1976 as provided in Rev. Rul. 76-282, 1976-2 C.B. 137 and Rev. Proc. 76-28, 1976-2 C.B. 645.
Although the taxpayer proposes to make the restorations of cost as required by Rev. Rul. 76-282 and Rev. Proc. 76-28 for Federal income tax purposes, the taxpayer does not propose to restore such writedowns for financial accounting purposes. The taxpayer also proposes to continue to take such writedowns for subnormal goods in subsequent years for financial accounting purposes only.
The specific questions presented are whether the special cost restoration required by Rev. Rul. 76-282 and Rev. Proc. 76-28 must also be made for financial reporting purposes in order to comply with section 472(c) and (e) of the Code, and whether the taxpayer may continue to value its LIFO inventory at less than actual cost for financial reporting purposes, without violating the requirements of section 472(c) and (e).
Section 472(a) of the Code permits a taxpayer to elect the LIFO inventory method. Section 472(b) states that under the LIFO method a taxpayer shall: (1) Treat the goods remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the taxable year to the extent thereof, and second, those acquired in the taxable year; (2) Inventory the goods at cost; and (3) Treat the goods included in the opening inventory of the taxable year in which the LIFO method is first used as having been acquired at the same time and determine their cost by the average cost method.
Section 472(c) of the Code states that if the taxpayer employs the LIFO method, the taxpayer shall establish to the satisfaction of the Secretary of the Treasury or the Secretary's delegate that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of section 472(b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the LIFO method is used, for the purpose of a report or statement covering such taxable year to shareholders, partners, proprietors, or beneficiaries, or for credit purposes.
Section 472(e)(2) of the Code, imposes a requirement similar to that contained in section 472(c), for taxable years subsequent to the year of the LIFO election, and provides that the taxpayer may be required to discontinue the use of the LIFO method if this requirement is violated.
Section 1.472-2(e) of the regulations contains the requirements of subsections (c) and (e)(2) of section 472 of the Code, and also provides that a taxpayer's use of market value in lieu of cost will not be considered at variance with these requirements.
Rev. Rul. 76-282 holds, in part, that the adjustment required under section 472(d) of the Code must include any write-down from actual cost with respect to subnormal goods that are unsalable at normal prices or unusable in the normal way, as defined in section 1.471-2(c) of the regulations, as well as normal goods that have been written down to market value under section 1.471-4 of the regulations. In addition, Rev. Rul. 76-282 contains a special cost restoration requirement for a taxpayer who had a LIFO election in effect for a taxable year beginning prior to September 24, 1976 (the effective date of Rev. Rul. 76-282).
Rev. Proc. 76-28 sets forth the application of section 1.471-2 of the regulations to the use of the LIFO inventory method. Rev. Proc. 76-28, in part, sets forth special cost restoration requirements for a taxpayer who had a LIFO election in effect for a taxable year beginning prior to September 24, 1976 (the effective date of Rev. Proc. 76-28), and had determined the carrying value of its LIFO inventory by reference to section 1.471-2. If such a taxpayer has on hand at the beginning of its first taxable year beginning after September 24, 1976, any goods on which the carrying value has been determined by reference to section 1.471-2, such goods must be valued at cost as of the end of the preceding taxable year.
In order to employ the LIFO inventory method, a taxpayer must value its LIFO inventory at actual cost for Federal income tax purposes. However, for financial reporting purposes, a taxpayer who employs the LIFO inventory method may value its LIFO inventory at the lower of LIFO cost or market, as provided in section 1.472-2(e) of the regulations, without violating the requirements of section 472(c) or (e)(2) of the Code. The determination of bona fide selling price less direct cost of disposition (as described in section 1.471-2(c) of the regulations) and the market price (as described in section 1.471-4 of the regulations) are both determinations of market as the term is used in section 1.472-2(e) of the regulations.
Accordingly, the taxpayer is not required to make the special cost restoration required by Rev. Rul. 76-282 and Rev. Proc. 76-28 for financial reporting purposes, and the taxpayer may continue to value its LIFO inventory for financial reporting purposes at the lower of LIFO cost or market without violating the requirements of section 472(c) and (e) of the Code.
1 Also released as IR-1747, dated February 1, 1977.
- Cross-Reference
26 CFR 1.472-2: Requirements incident to the adoption and use of LIFO
inventory method.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available