§472 — Last-in, first-out inventories
32 cases·15 followed·3 distinguished·1 questioned·13 cited—47% support
Statute Text — 26 U.S.C. §472
A taxpayer may use the method provided in subsection (b) (whether or not such method has been prescribed under section 471) in inventorying goods specified in an application to use such method filed at such time and in such manner as the Secretary may prescribe. The change to, and the use of, such method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income.
In inventorying goods specified in the application described in subsection (a), the taxpayer shall:
Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the taxable year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year;
Inventory them at cost; and
Treat those included in the opening inventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method.
Subsection (a) shall apply only if the taxpayer establishes to the satisfaction of the Secretary that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of subsection (b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year—
to shareholders, partners, or other proprietors, or to beneficiaries, or
for credit purposes.
The beginning inventory for the first taxable year for which the method described in subsection (b) is used shall be valued at cost. Any change in the inventory amount resulting from the application of the preceding sentence shall be taken into account ratably in each of the 3 taxable years beginning with the first taxable year for which the method described in subsection (b) is first used.
If a taxpayer, having complied with subsection (a), uses the method described in subsection (b) for any taxable year, then such method shall be used in all subsequent taxable years unless—
with the approval of the Secretary a change to a different method is authorized; or,
the Secretary determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (A) to shareholders, partners, or other proprietors, or beneficiaries, or (B) for credit purposes; and requires a change to a method different from that prescribed in subsection (b) beginning with such subsequent taxable year or any taxable year thereafter.
If paragraph (1) or (2) of this subsection applies, the change to, and the use of, the different method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income.
The Secretary shall prescribe regulations permitting the use of suitable published governmental indexes in such manner and circumstances as determined by the Secretary for purposes of the method described in subsection (b).
Except as otherwise provided in regulations, all members of the same group of financially related corporations shall be treated as 1 taxpayer for purposes of subsections (c) and (e)(2).
For purposes of paragraph (1), the term “group of financially related corporations” means—
any affiliated group as defined in section 1504 determined by substituting “50 percent” for “80 percent” each place it appears in section 1504(a) and without regard to section 1504(b), and
any other group of corporations which consolidate or combine for purposes of financial statements.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.472-1 Last-in, first-out inventories
- Treas. Reg. §Treas. Reg. §1.472-1(a) Any taxpayer permitted or required to take inventories pursuant to the provisions of section 471, and pursuant to the provisions of §§ 1.
- Treas. Reg. §Treas. Reg. §1.472-1(b) If the LIFO inventory method is used by a taxpayer who regularly and consistently, in a manner similar to hedging on a futures market, matches purchases with sales, then firm purchases and sales contracts (i.
- Treas. Reg. §Treas. Reg. §1.472-1(c) A manufacturer or processor who has adopted the LIFO inventory method as to a class of goods may elect to have such method apply to the raw materials only (including those included in goods in process and in finished goods) expressed in terms of appropriate units.
- Treas. Reg. §Treas. Reg. §1.472-1(d) For the purposes of this section, raw material in the opening inventory must be compared with similar raw material in the closing inventory.
- Treas. Reg. §Treas. Reg. §1.472-1(e) In the cotton textile industry there may be different raw materials depending upon marked differences in length of staple, in color or grade of the cotton.
- Treas. Reg. §Treas. Reg. §1.472-1(f) As to the pork packing industry a live hog is considered as being composed of various raw materials, different cuts of a hog varying markedly in price and use.
- Treas. Reg. §Treas. Reg. §1.472-1(g) When the finished product contains two or more different raw materials as in the case of cotton and rayon mixtures, each raw material is treated separately and adjustments made accordingly.
- Treas. Reg. §Treas. Reg. §1.472-1(h) Upon written notice addressed to the Commissioner of Internal Revenue, Attention T:R, Washington, D.
- Treas. Reg. §Treas. Reg. §1.472-1(i) The election may also be limited to that phase in the manufacturing process where a product is produced that is recognized generally as a salable product as, for example, in the textile industry where one phase of the process is the production of yarn.
- Treas. Reg. §Treas. Reg. §1.472-1(j) The election may also apply to any one raw material, when two or more raw materials enter into the composition of the finished product; for example, in the case of cotton and rayon yarn, the taxpayer may elect to inventory the cotton only.
- Treas. Reg. §Treas. Reg. §1.472-1(k) If a taxpayer using the retail method of pricing inventories, authorized by § 1.
- Treas. Reg. §Treas. Reg. §1.472-1(l) If a taxpayer uses consistently the so-called “dollar-value” method of pricing inventories, or any other method of computation established to the satisfaction of the Commissioner as reasonably adaptable to the purpose and intent of section 472 and this section, and if such taxpayer elects under section 472 to use the LIFO inventory method authorized by such section, the taxpayer's opening and closing inventories shall be determined under section 472 by the use of the appropriate adaptation.
- Treas. Reg. §Treas. Reg. §1.472-2 Requirements incident to adoption and use of LIFO inventory method
- Treas. Reg. §Treas. Reg. §1.472-2(a) §1.472-2(a)
- Treas. Reg. §Treas. Reg. §1.472-2(b) §1.472-2(b)
- Treas. Reg. §Treas. Reg. §1.472-2(c) §1.472-2(c)
- Treas. Reg. §Treas. Reg. §1.472-2(d) Pursuant to any other proper method which, in the opinion of the Commissioner, clearly reflects income.
- Treas. Reg. §Treas. Reg. §1.472-2(e) LIFO conformity requirement—(1) In general.
- Treas. Reg. §Treas. Reg. §1.472-2(f) Goods of the specified type on hand as of the close of the taxable year preceding the taxable year for which this 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 paragraph (c) of this section.
- Treas. Reg. §Treas. Reg. §1.472-2(g) §1.472-2(g)
- Treas. Reg. §Treas. Reg. §1.472-2(h) The records and accounts employed by the taxpayer in keeping his books shall be maintained in conformity with the inventory method referred to in § 1.
- Treas. Reg. §Treas. Reg. §1.472-2(i) Where the taxpayer is engaged in more than one trade or business, the Commissioner may require that if the LIFO method of valuing inventories is used with respect to goods in one trade or business the same method shall also be used with respect to similar goods in the other trades or businesses if, in the opinion of the Commissioner, the use of such method with respect to such other goods is essential to a clear reflection of income.
- Treas. Reg. §Treas. Reg. §1.472-2(v) Any method permitted under § 1.
- Treas. Reg. §Treas. Reg. §1.472-2(x) The use of actual cost of cut timber or the cost determined under section 631(a).
32 Citing Cases
We held that, although the alteration in question may have constituted the correction of an error, it also constituted a change in method of accounting pursuant to section 472(e).
(continued...) - 36 - We hold that Mountain State Ford's method of using replace- ment cost in determining the current-year cost of its parts pool under the dollar-value LIFO method contravenes the requirements of section 472(b)(2), section 1.472-2(b), Income Tax Regs., and section 1.472-8(e)(2)(ii), Income Tax Regs.
Petitioner wishes to incorporate transportation expenses into the definition of qualified expenses on the basis .of section 472 of the Higher Education,Act of 1965, 20 U .S .C.
We find all of those cases to be distinguishable and petitioner's reliance on them to be misplaced. In the interest of brevity, we shall discuss only the Hutzler Bros. Co. case. Because of the number and diversity of the goods of the taxpayer involved in Hutzler Bros. Co. v. Commissioner, supra, the taxpayer, a department store retailer, devised a LIFO inventory method that reduced the goods to their lowest common denominator, viz, a dollar figure. That method, which is now known as the dollar-v
he issues remaining for decision are: (1) Did respondent abuse respondent’s discretion in determining that Consolidated’s method of reporting certain raw materials, labor, and overhead on the LIFO inventory method and certain other raw materials on the FIFO inventory method does not clearly reflect income because it contravenes the requirements of section 472 and the regulations thereunder and that therefore Consolidated’s election to use that method should be terminated?
ding inventory are the last goods acquired or produced. Id. Under LIFO, it is assumed that the last goods acquired or produced are the first goods sold.4 Id. We are 3 FIFO is authorized by sec. 1.471-2(d), Income Tax Regs., and LIFO is authorized by sec. 472. 4 The following example is based on an example in Gertzman, Federal Tax Accounting, par. 7.02, at 7-4 (2d. ed. 1993) (cited hereafter as Gertzman par. __, at __): Example: Assume that, in its first year of operation, a (continued...) - 6 -
ding inventory are the last goods acquired or produced. Id. Under LIFO, it is assumed that the last goods acquired or produced are the first goods sold.4 Id. We are 3 FIFO is authorized by sec. 1.471-2(d), Income Tax Regs., and LIFO is authorized by sec. 472. 4 The following example is based on an example in Gertzman, Federal Tax Accounting, par. 7.02, at 7-4 (2d. ed. 1993) (cited hereafter as Gertzman par. __, at __): Example: Assume that, in its first year of operation, a (continued...) - 6 -
OPINION The issues presented implicate not only section 472, entitled “Last-In, First-Out Inventories”, but also section 446, entitled “General Rule for Methods of Accounting”, and section 471, entitled “General Rule for Inventories”.
263A(b)(2)(B) provides that certain taxpayers are excepted from complying with the UNICAP rules "ifthe average annual gross receipts ofthe taxpayer (or any predecessor) for the 3-taxable year period ending with the taxable yearpreceding such taxable year do not exceed $10,000,000." - 8 - costs for handling and storage, purch
529(e)(3)(B)(i)] shall not exceed the minimum amount (applicable to the student) included for room and board for such period in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, 20 U.S.C.
Section 472 permits taxpayers to value their inventories under the LIFO method. In contrast to the FIFO method of inventory valuation, which treats the first goods acquired as the first goods sold, the LIFO method of inventory valuation treats the last goods acquired as the first goods sold. Sec. 472(b); Fox Chevrolet, Inc. v. Commissioner, supra a