Rev. Proc. 76-5

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth the procedures to be used by the Internal Revenue Service when a change to the full absorption method of inventory costing described in section 1.471-11 of the Income Tax Regulations is requested by a taxpayer employing the last-in, first-out (LIFO) inventory method as provided in section 472 of the Internal Revenue Code of 1954.

Sec. 2. Scope.

The scope of this Revenue Procedure is limited to those situations in which a taxpayer has filed a Form 3115 (Application for Change in Accounting Method) to receive the Service's permission to elect the full absorption method of inventory costing. The taxpayer has also elected in a prior year, or will elect for the year of the full absorption change, to employ the LIFO inventory method. However, prior to receiving consent from the Service to elect the full absorption method the taxpayer issues its annual financial statements. The annual financial statements are issued on the LIFO inventory method and on the basis of the full absorption inventory costing method as requested by the taxpayer when it filed its Form 3115.

Sec. 3. Background.

.01 Section 472(a) of the Code provides that a taxpayer may adopt the LIFO method of inventorying goods provided certain conditions are satisfied. One of the conditions is that an application to use such method must be filed in such manner as the Secretary or the Secretary's delegate may prescribe.

.02 Section 472(b) of the Code provides that in inventorying goods specified in the application described in subsection (a), the taxpayer shall:

(1) Treat those remaining on hand at the close of the taxable year as being; first, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof and second, those acquired in the taxable year;

(2) Inventory them at cost; and

(3) Treat those included in the opening inventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method.

.03 Section 472(c) of the Code provides that subsection (a) shall apply only if the taxpayer establishes to the satisfaction of the Secretary or the Secretary's delegate that the taxpayer has used no procedure other than that specified in paragraph (1) and (3) of subsection (b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year.

.04 Section 472(e)(2) of the Code provides that if a taxpayer, having complied with subsection (a), uses the method described in subsection (b) for any taxable year, then such method shall be used in all subsequent taxable years unless the Secretary or the Secretary's delegate determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (A) to shareholders, partners, . . . or (B) for credit purposes.

.05 Section 1.471-11(e)(1)(i) of the regulations provides, in part, that a taxpayer not using the full absorption method of inventory costing, as prescribed in section 1.471-11(a) must change to that method.

.06 Section 1.471-11(c)(2)(i) of the regulations describes certain indirect production costs that must be included in a taxpayer's inventory.

.07 Section 1.471-11(c)(2)(ii) of the regulations describes certain indirect production costs that may be excluded from a taxpayer's inventory.

.08 Section 1.471-11(c)(2)(iii) of the regulations describes certain indirect production costs that may be included in or excluded from a taxpayer's inventory depending upon the taxpayer's treatment of such costs in its financial reports.

.09 Section 5 of Rev. Proc. 75-40, 1975-2 C.B. 571, prescribes certain representations that must be made by the taxpayer or certain representations that may be made by its representative when changing to the full absorption method.

Sec. 4. Application. .01 The Service has received numerous applications from taxpayers who wish to elect the full absorption method. In processing such applications, the necessity of securing additional information from the taxpayer or its representatives may delay the granting of consent to elect the full absorption method until after the taxpayer has issued its financial statements.

.02 In certain cases, the taxpayer will have issued its annual financial statements prior to receiving the consent of the Service to elect the full absorption method. In such a case, the taxpayer may have issued its annual financial statements on the basis of the full absorption method that it requested the Service to approve when it filed its Form 3115.

.03 The issuance of financial statements on a full absorption method other than that for which consent is eventually granted, has caused concern among those taxpayers who employ the LIFO inventory method because of the conformity requirements contained in sections 472(c) and (e) of the Code.

Sec. 5. Procedure.

The Service will not terminate the LIFO election of a taxpayer who timely files the application referred to above solely because the taxpayer employed the requested full absorption method in its annual financial statements and that method is different from the full absorption method for which consent is eventually granted.

Sec. 6. Inquiries.

Inquiries in regard to this Revenue Procedure should refer to its number and should be addressed to the Commissioner of Internal Revenue, Attention T:C:C, Internal Revenue Service, Washington, D.C. 20224.

² Also released as TIR 1432, dated January 12, 1976.