Rev. Proc. 73-37

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth the procedure to be used by the Internal Revenue Service in the examination of Federal income tax returns involving the LIFO inventory requirements of section 472(c) of the Internal Revenue Code of 1954 in the year a taxpayer elects to use the LIFO inventory method and for which the principles set forth in Accounting Principles Board Opinion No. 20 (A.P.B. 20) issued by the Accounting Principles Board of the American Institute of Certified Public Accountants in July 1971, require that the income ascertained under the former method of accounting be shown in a footnote to the financial statement.

Sec. 2. Scope.

The scope of this Revenue Procedure is limited to those taxpayers whose financial statements are prepared in compliance with the requirements of A.P.B. 20 with respect to a change from another inventory method to the LIFO inventory method. The scope thus excludes those taxpayers who adopt the LIFO inventory method in their first taxable year and taxpayers who have not previously had inventories for Federal income tax purposes.

Sec. 3. Background.

Section 472(c) of the Code and the regulations issued thereunder provide, in effect, that a taxpayer may not use the LIFO inventory method unless he establishes to the satisfaction of the Secretary or his delegate that he has used no procedure other than the LIFO method for purposes of an annual report to shareholders, partners, other proprietors, beneficiaries, or for credit purposes. Thus, where there is a variance between the LIFO procedures used for Federal income tax purposes and for financial accounting purposes, the Secretary or his delegate may terminate the LIFO election of a taxpayer for a violation of the above requirements.

A.P.B. 20 deals with changes in accounting principles and their justification. It states that the presumption that an entity should not change an accounting principle may be overcome only if the enterprise justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. For this reason, it requires that the nature and justification for a change in accounting principle and its effect on income should be disclosed in the financial statements of the period in which the change is made, and that the justification for the change should explain clearly why the newly adopted accounting principle is preferable. There long has been a requirement that the effect of changes in accounting principles for prior years be disclosed in the financial reports for the year of change.

Although most changes in accounting principles affect the income of prior periods, which A.P.B. 20 requires to be disclosed for comparison purposes, this is not always true of the change from another method of inventory valuation to the LIFO inventory method. Therefore, the only effect on income that is possible to disclose is the effect for the year of change.

Sec. 4. Application.

In the examination of returns, if a taxpayer is required by A.P.B. 20 to show in a footnote to the financial statements its income under the inventory method previously used as a justification for the change to the LIFO inventory method, the LIFO election for tax purposes will not be terminated solely because of the application of A.P.B. 20.

Sec. 5. Effective Date.

This Revenue Procedure shall apply to all financial statements issued for fiscal years beginning after July 31, 1971. It should be noted that although the Service will not invoke the reporting requirements of subsection 472(c) of the Code with respect to the variation caused by the application of A.P.B. 20, the provisions of section 472(e) will be applicable to any disclosures for subsequent years.