Rev. Rul. 76-475

Advice has been requested whether a taxpayer may disclose in its annual financial statements the impact of estimates made in interim financial statements that subsequently proved to be erroneous, without violating the conformity requirements of section 472(c) and (e)(2) of the Internal Revenue Code of 1954.

The taxpayer uses the last-in, first-out (LIFO) inventory method as provided in section 472 of the Code. The taxpayer reported its interim earnings on the LIFO inventory method using an estimate of year-end LIFO costs. This estimate subsequently proved to be erroneous and the taxpayer included in its annual financial statements a footnote that disclosed the impact of this erroneous estimate. The language in the footnote was substantially similar to the following:

LIFO inventories at December 31, 1975, were greater than originally projected during the year. If the 1975 interim results were adjusted to reflect the actual level of inventories at December 31, 1975, the earnings per share for the first three quarters would have been higher than originally reported by $XX, $XX, and $XX, respectively, and fourth quarter earnings lower by $X.

The taxpayer used only the LIFO inventory method in all other portions of its annual financial statements.

Section 472(c) of the Code provides that a taxpayer must not have used any procedure other than the LIFO procedure in inventorying goods included within the LIFO election to ascertain the income, profit, or loss for the first taxable year it uses the LIFO method for the purpose of reports to shareholders, proprietors, beneficiaries or creditors.

Section 472(e)(2) of the Code imposes substantially the same requirement as section 472(c) on subsequent taxable years, and authorizes the Secretary of the Treasury or the Secretary's delegate to require the taxpayer to change to another method of inventory identification and valuation when this requirement has not been met.

In the instant case, because the taxpayer did not use a method other than the LIFO inventory method in its annual and interim financial statements, the disclosure does not indicate the effect of using a different accounting method.

Accordingly, the footnote in the taxpayer's annual financial statements may be used without violating the conformity requirements of section 472(c) and (e)(2) of the Code.