Internal Revenue Service
Revenue Ruling
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smRev. Rul. 54-49
1954-1 C.B. 32
Section 472
IRS Headnote
A `specialty store,' as defined in Rev. Rul. 23, C.B. 1953-1, 34, using the cost inventory method may employ, under the elective inventory method prescribed by section 22(d) of the Internal Revenue Code, cost price indexes which are derived from the department store inventory (retail) price indexes, published by the Bureau of Labor Statistics, by the use of appropriate ratios based on cost percentages for the respective departments.
Full Text
Rev. Rul. 54-49
Advice is requested whether a specialty store that keeps its inventory records on the basis of cost, and desires to adopt the elective inventory method prescribed by section 22(d) of the Internal Revenue Code, may employ cost price indexes derived from the department store inventory (retail) price indexes published by the United States Bureau of Labor Statistics, if it meets the requirements of Rev. Rul. 23, C.B. 1953-1, 34, with the exception of employing the retail inventory method.
Rev. Rul. 23 supra , holds that a retail establishment known in the trade as a `specialty store' may, without further proof, qualify as a `department store' for use of the department store inventory price indexes published by the Bureau of Labor Statistics, under the elective inventory method prescribed by section 22(d) of the Internal Revenue Code, if it employs the retail inventory method and carries a variety and a reasonably full line of merchandise covering a reasonable field of the groups included in such indexes.
The group indexes published by the Bureau of Labor Statistics under the title `Department Store Inventory Price Indexes' measure changes in the retail prices of the classes of goods described thereunder. They do not purport to measure changes in wholesale or cost prices to a retail department or specialty store. They are not directly applicable, therefore, for use by a specialty store using the cost inventory method for determining the adjustment for price changes subsequent to the close of the preceding taxable year under Treasury Decision 5605, C.B. 1948-1, 16. However, under certain circumstances appropriate cost price indexes for a specialty store using the cost inventory method may be derived from the Bureau of Labor Statistics department store inventory (retail) price indexes by reference to the changes in the cost complements of the gross profit margins of the individual specialty store for appropriate classes of goods.
The difference between the movements of wholesale (or cost) and retail prices for any given year must be reflected in a change in the markon percentage, since cost and retail prices would necessarily change by the same relative amount if the markon were uniform. The change in the net markon percentage, or its complement, the cost percentage, may therefore be used to derive a cost index from a retail price index for a given department. The cost index between two dates is equal to the retail price index between these two dates multiplied by the fraction representing the ratio between the cost percentages at the first and second dates, respectively, as illustrated below:
Department A
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12/31/50 12/31/51 12/31/52
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1. Retail price index
appropriate group index)... 100.0 150.0 160.0
2. Net markon percentage (see
Note A).................... 40.2% 42.7% 38.5%
3. Cost percentage (comple-
ment of line 2)............ 59.8% 57.3% 61.5%
4. Ratio of cost percentages
(current year over base
year)...................... 59.8/59.8 57.3/59.8 61.5/59.8
5. Cost price index (line 1
times line 4).............. 100.0 143.7 164.5
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NOTE A. -- To be determined by the taxpayer for each department on the
basis of its own average for the taxable year.
A specialty store on the cost inventory method does not ordinarily compute the net markon percentages for its respective departments, for this is a tool of the retail inventory method. It does, however, compute its gross profit percentages for its respective departments, essentially the same quantity. The only material difference between the two is that the former is computed on the year's purchases, and the latter on the year's sales, and this difference will average out over a few years. It is, therefore, appropriate to derive a cost index by reference to the ratio between cost percentages derived by taking the complements of the gross profit ratios for a department.
A simplified method of computing is available, particularly for use when the base date for the retail price index is prior to the year of adoption of the elective inventory method by the taxpayer. This may be illustrated as follows:
Department B
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1/1/50 1/1/51 1/1/52
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1. Retail price index (Jan.
1, 1941 = 100) (B.L.S.
Group I)................. 191.3 216.4 211.7
2. Gross profit percentage
(see Note A)............. 41.2% 40.7% 41.5%
3. Cost percentage (comple-
ment of line 2).......... 58.8% 59.3% 58.5%
4. Adjusted price index
(line 1 multiplied by
line 3).................. 112.4844 128.3252 123.8445
5. Cost price index (Jan 1,
1950=100) (line 4 divided
by 112.4844 and multiplied
by 100).................. 100.0 114.1 110.1
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NOTE A. -- To be determined by the taxpayer for each department on the
basis of its own average for the taxable year.
The use of derived cost price indexes, as described above, by specialty stores on the cost inventory method will be subject to all the conditions of Mimeograph 6244, C.B. 1948-1, 21, and Rev. Rul. 23, C.B. 1953-1, 34, except the condition that the taxpayer employ the retail inventory method.