Rev. Proc. 74-51

Section 1. Purpose.

The purpose of this Revenue Procedure is to modify Sec. 3.01 of Rev. Proc. 70-27, 1970-2 C.B. 509, concerning the scope of that Revenue Procedure.

Sec. 2. Background.

.01 Section 1.471-11(e)(1)(i) of the Income Tax Regulations provides, in part, that a manufacturer not using the full absorption method of inventory costing, as prescribed by section 1.471-11(a) of the regulations, must change to that method. Section 1.471-11(e)(1)(ii) of the regulations provides, in part, that if a taxpayer elects to change to the full absorption method of inventory costing during the transition period, such election shall be made during the first 180 days of any taxable year beginning on or after September 19, 1973, and before September 19, 1975 (the transition period).

.02 Section 1.471-11(e)(3)(i) of the regulations provides, in part, that in the case of a taxpayer who properly makes an election under section 1.471-11(e)(1)(ii) of the regulations during the transition period, then such taxpayer may elect to take any adjustment required by section 481 of the Internal Revenue Code of 1954, with respect to any inventory being revalued under the full absorption method, into account ratably over a period designated by the taxpayer at the time of such election, not to exceed the lesser of 10 taxable years, commencing with the year of transition, or the number of years the taxpayer has been on the inventory method from which he is changing.

.03 Section 3.01 of Rev. Proc. 70-27 provides that a taxpayer's request to change his accounting practice or method for Federal income tax purposes to an acceptable practice or method consistent with the regulations will ordinarily receive favorable consideration, provided he proposes and agrees as a condition to the change to take the necessary resulting adjustment into account ratably over an appropriate period, prescribed by the Commissioner, generally 10 years.

.04 Section 3.01 of Rev. Proc. 70-27 provides that ordinarily the taxable year for which the change is requested shall be referred to as the "year of transition." The period to be used for allocating the resulting adjustment shall begin with the year of transition.

.05 The purpose of the transition rules under section 1.471-11(e) was to make changes to the full absorption method of inventory costing a mandatory requirement during the transition period, and to provide in connection therewith reasonable transition methods. It was not intended to allow taxpayers to defer changing to the full absorption method beyond the transition period and then to utilize the provisions of Rev. Proc. 70-27 to obtain a ten-year spread of the resulting adjustment. To allow such an application of Rev. Proc. 70-27 would tend to frustrate the purpose of the transition rules under section 1.471-11(e).

Sec. 3. Implementation.

.01 Rev. Proc. 70-27 is modified to provide that it will not apply to a taxpayer changing to the full absorption method of inventory costing as required by section 1.471-11(e)(1)(i) of the regulations.

.02 Any change to the full absorption method of inventory costing after the transition period described in section 1.471-11(e) is a change in method of accounting subject to the provisions of sections 446 and 481 of the Code.

Sec. 4. Effect on Other Documents.

Rev. Proc. 70-27 is modified as provided above.

¹ Also released as TIR-1317, dated December 2, 1974.