Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 62-77

1962-1 C.B. 80

Sec. 472

IRS Headnote

Wholesalers, retailers, jobbers and distributors using a method of valuing their inventories other than the last-in, first-out (LIFO) method, who desire to change to the dollar-value LIFO method and wish to adopt the natural business unit method of pooling in connection therewith must obtain, for any taxable year, the Commissioner's prior permission to adopt such method of pooling. Such taxpayers already valuing their inventories by the dollar-value LIFO method and using a method of pooling authorized by section 1.472-8 of the Income Tax Regulations must likewise obtain, for any taxable year, the Commissioner's prior permission to change their method of pooling to the natural business unit method of pooling.

A change by such wholesalers, retailers, etc., from the unit or specific goods LIFO method, using separate LIFO pools, to the dollar-value LIFO method, using the same LIFO pools as used under the unit method, may be made by such a taxpayer under section 1.472-8(f)(1) of the regulations without securing the Commissioner's prior approval.

A change from the unit or specific goods LIFO method to the dollar-value LIFO method using a natural business unit pool or pools by and taxpayer regardless of the nature of his business, requires the permission of the Commissioner.

Full Text

Rev. Rul. 62-77

Advice has been requested as to the various circumstances under which taxpayers, particularly wholesalers, retailers, jobbers and distributors, are required to obtain the permission of the Commissioner of Internal Revenue to change to the dollar-value last-in, first-out (LIFO) inventory method, using a natural business unit pool or pools, of valuing inventories, particularly in view of the respective provisions of sections 1.472-8(c), 1.472-8(f)(1), and 1.472-8(h)(1) of the Income Tax Regulations.

Section 1.472-8(a) of the regulations provides, in part, that any taxpayer may elect to determine the cost of his LIFO inventories under the so-called `dollar-value' LIFO method, provided such method is used consistently and clearly reflects the income of the taxpayer in accordance with the rules of that section. The dollar-value method of valuing LIFO inventories is a method of determining cost by using `base-year' cost expressed in terms of total dollars rather than the quantity and price of specific goods as the unit of measurement. Under such method the goods contained in the inventory are grouped in a pool or pools as described in paragraphs (b) and (c) of section 1.472-8 of the regulations with reference to manufacturers or processors and in paragraph (c) of that section with reference to wholesalers, retailers, etc.

Under section 1.472-8(c) of the regulations, items of inventory in the hands of wholesalers, retailers, jobbers, and distributors, shall be placed into pools by major lines, types, or classes of goods. In determining such groupings, it is provided that customary business classifications of the particular trade in which the taxpayer is engaged is an important consideration. An example of such customary business classification is the department in the department store. In such cases, practices are relatively uniform throughout the trade, and departmental grouping is peculiarly adapted to the customs and needs of the business. However, in appropriate cases, the principles set forth in paragraphs (b)(1) and (2) of section 1.472-8 of the regulations, relating to pooling by natural business units, may be used by wholesalers, retailers, jobbers, or distributors with the permission of the Commissioner.

Section 1.472-8(f)(1) of the regulations provides that, except as provided in section 1.472-3 of the regulations, in the case of a taxpayer electing to use a LIFO inventory method for the first time, or in the case of a taxpayer changing to the dollar-value method and continuing to use the same pools as were used under another LIFO method, a taxpayer using another LIFO method of pricing inventories may not change to the dollar-value method of pricing such inventories unless he first secures the consent of the Commissioner in accordance with paragraph (e) of section 1.446-1 of the regulations.

Section 1.472-8(g)(1) of the regulations provides that any method of pooling authorized by section 1.472-8 and used by the taxpayer in computing his LIFO inventories under the dollar-value method shall be treated as a method of accounting. Any method of pooling which is authorized by that section shall be used for the year of adoption and for all subsequent taxable years unless a change is required by the Commissioner in order to clearly reflect income, or unless permission to change is granted by the Commissioner as provided in paragraph (e) of section 1.446-1 of the regulations. Where the taxpayer changes from one method of pooling to another method of pooling permitted by that section, the ending LIFO inventory for the taxable year preceding the year of change shall be restated under the new method of pooling.

Under section 1.472-8(h)(1) of the regulations, it is provided, in part, that notwithstanding the provisions of paragraph (g) of section 1.472-8, a taxpayer, for his first taxable year ending after April 15, 1961, may change from one method of pooling authorized by section 1.472-8 to any other method of pooling authorized by that section, provided the requirements of subparagraph (2) of paragraph (h) are met. Also, it is provided that, for such year if a taxpayer is currently using only a method of pooling which would be authorized by that section if additional items were included in the pool, and could change to the natural business unit method except for the fact that he has not inventoried all items entering into the inventory investment for such natural business unit of the LIFO method, he may change to the natural business unit method if he elects, under the provisions of section 1.472-3, to extend the LIFO election to all items entering into the entire inventory investment for such natural business unit, provided the requirements of subparagraph (2) of that paragraph are met.

Since the natural business unit method of pooling is not an authorized method for wholesalers, retailers, jobbers and distributors without the Commissioner's prior permission under section 1.472-8(c) of the regulations, and since section 1.472-8(h) is applicable only to taxpayers changing from one authorized method of pooling to another authorized method of pooling under section 1.472-8, it is held that wholesalers, retailers, jobbers and distributors may not change from any other method of pooling to the natural business unit method without the Commissioner's prior permission.

A change from the unit or specific goods LIFO method using separate LIFO pools, to the dollar-value LIFO method, using the same LIFO pools as used under the unit or specific goods LIFO method, may be made by such a taxpayer without the Commissioner's permission under the exception provided in section 1.472-8(f)(1) of the regulations.

With respect to all taxpayers using the unit or specific goods LIFO method, nothing in sections 1.472-8(f)(1) and 1.472-8(h)(1) of the regulations permits the change from such unit or specific goods LIFO method to the dollar-value LIFO method, using a natural business pool or pools, without the Commissioner's permission for the first taxable year ending after April 15, 1961.

However, wholesalers, retailers, jobbers and distributors electing to use the dollar-value LIFO method for the first time, utilizing a method of pooling by major lines, types or classes of goods, shall do so by filing an application, Form 970, Application for the Adoption and Use of the Elective Inventory Method, and by otherwise complying with the provisions of sections 1.472-3 of the regulations. In such case the appropriateness of the method of pooling used, as well as the propriety of all computations incidental to the use of such pools, will be determined by the Commissioner through the appropriate District Director in connection with the examination of the returns of such taxpayers. See sections 1.472-3(d) and 1.472-8(d) of the regulations.

Where wholesalers, retailers, jobbers and distributors wish to use the natural business unit method of pooling in connection with a change to the dollar-value LIFO method from a method of valuation other that the LIFO method, the prior permission of the Commissioner to do so is required for any taxable year. See section 1.472-8(c) of the regulations. Such permission must be secured in accordance with section 1.446-1(e) of the regulations.

In each case where a wholesaler, retailer, jobber or distributor applies to the Commissioner for permission to change to the dollar-value LIFO method, using a natural business unit pool or pools, for valuing his inventories, he must clearly demonstrate that such natural business unit method of pooling is appropriate and clearly reflects income.