Rev. Rul. 78-49

Advice has been requested whether the taxpayer violates the conformity requirement of section 472(e)(2) of the Internal Revenue Code of 1954 in the situations described below.

Situation (1). The taxpayer elected the last-in, first-out (LIFO) inventory method for its taxable year ended December 31, 1975, and issued all of its annual reports and statements for 1975 on the LIFO method. During 1976, the taxpayer issued interim financial statements for the first three calendar quarters (March 31, June 30, and September 30), using the first-in, first-out (FIFO) inventory method. The taxpayer did not issue an interim statement for the fourth calendar quarter, but rather, issued its annual financial statements and reports prepared solely on the LIFO method.

Situation (2). The facts are the same as Situation 1 except the taxpayer also issued an interim financial statement for the fourth calendar quarter that was prepared on a FIFO basis. At the same time, the taxpayer issued its annual statements on a LIFO basis.

Situation (3). The taxpayer elected the LIFO inventory method for its taxable year ended December 31, 1975, and issued all of its annual reports and statements for 1975 solely on the LIFO method. During 1976, the taxpayer issued interim financial statements for the first three calendar quarters (March 31, June 30, and September 30), using the LIFO method, but disclosed in a footnote what the income would have been had the inventory been valued under the FIFO method. The taxpayer did not issue an interim statement for the fourth calendar quarter, but rather, issued its annual financial statements and reports prepared solely on the LIFO method without making any reference to what the income would have been had the LIFO method been used.

Situation (4). The facts are the same as Situation (3) except the taxpayer also issued an interim financial statement for the fourth quarter, using the LIFO method but disclosing in a footnote what the income would have been had the inventory been valued under the FIFO method.

Section 472(e)(2) of the Code states, in part, that once the taxpayer has elected the LIFO method, it must be used in all subsequent taxable years unless the Secretary determines that the taxpayer has used a procedure other than LIFO in a subsequent taxable year for purposes of a report or statement covering such taxable year to shareholders, partners, proprietors, or beneficiaries, or for credit purposes.

Section 1.472-2(e) of the Income Tax Regulations reiterates the conformity requirement contained in section 472(e)(2) of the Code, and states, in part, that the issuance of reports or credit statements covering a period of operations less than the whole of a taxable year is not considered at variance with this requirement.

The conformity requirement of section 472(e)(2) of the Code relates to the issuance of reports or statements that include the operating results of the taxpayer for the entire taxable year. Section 1.472-2(e) of the regulations specifically exempts from the conformity requirement a report or credit statement that does not include or result in the disclosure of the operating results for the entire taxable year. However, if the interim reports can be combined to show the operating results of the taxpayer for the entire taxable year, the effect would be the same as issuing one report or statement for the entire taxable year on a method other than the LIFO method.

Accordingly, in Situation 1, the conformity requirement of section 472(e)(2) of the Code does not apply to the three quarterly interim financial statements issued by the taxpayer because such interim statements are reports covering less than a whole taxable year and therefore not at variance with the conformity requirement of section 472(e)(2). In Situation 2, the issuance of four quarterly interim financial statements using the FIFO method, which can be combined to show the operating results for the entire taxable year, constitutes the issuance of a report covering the entire taxable year, and is therefore a violation of the conformity requirement of section 472(e)(2). In Situation 3, the conformity requirement of section 472(e)(2) does not apply to the three interim statements, notwithstanding the fact that a footnote disclosure was made of the determination of income on the FIFO method. So long as interim reports do not form an annual report when combined, such statements are not at variance with the conformity requirement of section 472(e)(2). Finally, in Situation 4, the issuance of four quarterly interim financial statements using the LIFO method, which contain footnote disclosures of the determination of income on the FIFO method, which can be combined to show the operating results for the entire taxable year, constitutes the issuance of a report covering the entire taxable year, and is therefore a violation of the conformity requirement of section 472(e)(2).

Furthermore, if in each of the first three situations the taxpayers had made the same disclosures in the initial year of adopting the LIFO method of accounting for inventories, the conformity requirement of section 472(c) would be applied in the same manner as the conformity requirement of section 472(e)(2). However, in Situation 4, the footnote disclosures would be permitted even though the interim reports of the year of the LIFO election could be combined to form an annual report, provided the combined disclosure did not exceed that authorized by Rev. Proc. 75-10, 1975-1 C.B. 651.