Rev. Proc. 76-6

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth procedures relating to the proper adoption and use of the last-in, first-out (LIFO) inventory method and the required restoration of any write-down to market values resulting from the pricing of former inventories under section 472(d) of the Internal Revenue Code of 1954.

Sec. 2. Scope. This Revenue Procedure is limited to taxpayers who have elected or plan to elect to change to the LIFO inventory method and are required under section 472(d) of the Code to value the closing inventory of the preceding taxable year at cost for the purpose of determining the income of the taxable year preceding the taxable year for which the LIFO inventory method is first used. This Revenue Procedure also applies to taxpayers who have extended or plan to extend their LIFO elections to additional segments of inventory.

Sec. 3. Background.

.01 Section 472(d) of the Code provides that in determining income for the taxable year preceding the taxable year for which the LIFO method is first used, the closing inventory of such preceding year shall be valued at cost. Section 1.472-2 of the Income Tax Regulations, entitled "Requirements incident to adoption and use of LIFO inventory method," sets forth a number of requirements that must be met by a taxpayer adopting LIFO. The pertinent requirements for purposes of this Revenue Procedure are found in section 1.472-2(c) and 1.472-2(f). Section 1.472-2(c) provides that the actual cost of the goods included in the opening inventory of the taxable year in which the LIFO method is first used shall be determined pursuant to the inventory method employed by the taxpayer under the regulations applicable to the prior taxable year with the exception that restoration shall be made with respect to any write-down to market values that resulted from the pricing of former inventories. Section 1.472-2(f) provides that goods of the specified type on hand as of the close of the taxable year preceding the taxable year for which the LIFO inventory method is first used shall be included in the taxpayer's closing inventory for such preceding taxable year at cost determined in the manner prescribed in section 1.472-2(c).

.02 Section 1.472-4 of the regulations provides, in part, that a taxpayer may not change to the LIFO method of taking inventories unless at the time he files his application for the adoption of such method he agrees to such adjustments, incident to the change to or from such method, or incident to the use of such method, in the inventories of prior taxable years.

Sec. 4. Application.

.01 In order to properly satisfy the requirement of section 472(d) of the Code, with respect to the valuation of the closing inventory of the taxable year preceding the taxable year for which the LIFO inventory method is first used and in order to properly make the LIFO election, the taxpayer must file an amended Federal income tax return for such preceding taxable year and value the closing inventory of such preceding taxable year at cost.

.02 The amended return, with respect to the taxable year preceding the taxable year for which the LIFO inventory method is first used, must be filed with the Federal income tax return for the taxable year for which the LIFO inventory method is first used.

.03 Any adjustment necessary in order to restate the preceding year's ending inventory at cost as required by section 472(d) of the Code, to the full extent thereof, must be taken into account and reflected in the income of the amended return for the preceding taxable year.

.04 A taxpayer who failed to file an amended return within the time prescribed by section 4.02 of this Revenue Procedure for the taxable year preceding the taxable year in which the LIFO inventory method is first used may "perfect" the LIFO election by filing the required amended return within 210 days after January 15, 1976.

.05 If the preceding taxable year for which the taxpayer is required to file an amended return is barred for assessment by the statute of limitations (that is, the taxable year preceding the year for which the LIFO inventory method is elected), for purposes of section 4.04 of this Revenue Procedure, the Internal Revenue Service will accept an amended return for the earliest taxable year which, by the end of the 210-day period referred to in section 4.04, is not barred by the statute of limitations, if such amended return is filed within such 210-day period. In such amended return the market write-downs for the barred preceding year should be treated as an "other item of income" and included in the computation of taxable income for such earliest taxable year.

.06 The provisions of sections 4.01 through 4.05 are applicable regardless of whether the items of inventory as of the close of the taxable year preceding the taxable year in which the LIFO inventory method is first used have been disposed of prior to the filing of the required amended return.

.07 If a taxpayer that is required to file an amended return for the taxable year preceding the taxable year in which the LIFO inventory method is first used fails to comply with sections 4.01 through 4.05, whichever are applicable, the Service upon examination of such taxpayer's Federal income tax return may require the taxpayer to discontinue the LIFO inventory method.

.08 An amended return under section 4.04 or 4.05 will not be required if the market value restoration referred to in section 472(d) of the Code was made prior to January 15, 1976, pursuant to an agreed adjustment made by the Internal Revenue Service in connection with the examination of the Federal income tax return for the year preceding the year of the LIFO election. Furthermore, an amended return under section 4.04 or 4.05 will not be required if a taxpayer, in a Federal income tax return filed prior to January 15, 1976, restored in the taxable year in which the LIFO method is first used (or extended), the write-down referred to in section 472(d) either as an "other item of income" or as a reduction of cost of goods sold. However, if the year preceding the year of the LIFO election is not barred before June 1, 1976 by the statute of limitations, an amended Federal income tax return for such preceding year will be required of taxpayers who restored the market value write-down in the year of the LIFO election.

Where such taxable year is not so barred but will be barred prior to the date for filing an amended return as provided in section 4.04, a properly executed consent to extend the statute of limitations should be submitted to the Service immediately so that the amended return can be timely filed by the date provided for in section 4.04.

.09 If a taxpayer is required to file an amended return for the year preceding the year in which the LIFO method was first used (or extended) under the provisions of section 4.08 above, the taxpayer must also file an amended return for the year in which the LIFO method was first used (or extended) and exclude from such return the amount of the market write-down improperly included.

.10 The two amended returns required by section 4.09 above, should be filed simultaneously and any overpayment for the year in which the LIFO method is first used (or extended) will be applied against any underpayment for the preceding year. A payment will be required if the amount due, principal and interest, for the preceding year is greater than the overpayment, principal and interest, for the year in which the LIFO method is first used (or extended). When the two amended returns affect other areas of the Code (for example, net operating losses, investment credit, etc.), the tax liability must be computed accordingly. Interest will normally be due as a result of the filing of the two amended returns.

.11 In order to assist in the processing of these amended returns, the taxpayer should include a covering letter clearly indicating that the two returns are being filed in accordance with the provisions of Rev. Proc. 76-6. Language similar to the following should be used:

"Claim filed based on revision to Rev. Proc. 76-6 dated May 13, 1976. Amended return reporting additional tax (or vice versa--claiming refund) filed June XX, 1976."

Sec. 5. Inquiries.

Inquiries regarding this Revenue Procedure may be addressed to the Commissioner of Internal Revenue, Attention: T:C:C, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

¹ Also released as TIR-1433, dated 1-15-76.