Rev. Proc. 74-18

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(e) of the Internal Revenue Code of 1954 for those taxpayers with respect to the fiscal year ended on or about January 31, 1974, who are required by the Securities and Exchange Commission (SEC) to disclose in news releases and annual reports the effect on earnings resulting from the inflationary cost of goods sold caused by the sharp unexpected increases in the Department Store Inventory Price Indexes (DSI) for January 1974 compiled by the Bureau of Labor Statistics (BLS).

Sec. 2. Scope.

.01 The scope of this Revenue Procedure is limited to taxpayers using the BLS index figures in valuing their LIFO inventories under the authority of section 1.472-8(e)(1) of the Income Tax Regulations. The scope is further limited to those taxpayers using DSI as determined at January 31, 1974, who are subject to the rules and regulations of the SEC to make the disclosures referred to in Section 1 of this Revenue Procedure.

.02 This Revenue Procedure shall have no effect on any disclosure of whatever type in news releases or annual reports for any past or future taxable years with respect to the LIFO method.

Sec. 3. Background.

.01 Section 472(e) of the Code and the regulations thereunder provide, in effect, that a taxpayer may not use the LIFO inventory method unless he establishes to the satisfaction of the Secretary of the Treasury 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. These provisions also provide that such requirements shall apply to the continued use of the LIFO method. 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.

.02 The SEC is charged with the responsibility of administering the disclosure and reporting requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC requires that material information affecting a company's earnings and its earnings per share be disclosed to avoid giving public investors a misleading impression of such earnings and earnings per share.

.03 The unusually sharp increase in the BLS index figures for January 1974 has resulted in high cost of sales for those taxpayers using the LIFO inventory method and a fiscal year ended on or about January 31, 1974, as compared with prior taxable years.

Sec. 4. Application.

In the examination of returns, if a corporation using the LIFO inventory method in conjunction with the BLS index figures is required by the SEC to make the following type of disclosure statements in its annual report, news releases, or other published reports for its fiscal year ending on or about January 31, 1974, its LIFO election under section 472 of the Code will not be terminated solely because of the use of such statements in published reports:

.01 Type of disclosure statements to be used in portions of the annual reports, etc., other than in the financial statements section:

     Inflation in the cost of goods sold reduced earnings by

     Inflation in the cost of goods sold reduced net earnings by