IRS ANNOUNCES NEW REQUIREMENT FOR SOME LIFO ACCOUNTING METHOD CHANGES.

Announcement 91-173

This announcement provides guidance to taxpayers regarding certain voluntary accounting method changes for last-in, first-out (LIFO) inventory pursuant to section 446 of the Internal Revenue Code and the underlying regulations.

In Hamilton Industries Inc. v. Commissioner 97 T.C. 120 (1991), the Tax Court held that inventory items acquired in two bulk bargain purchases, made in conjunction with acquisitions of substantially all of the assets of two trades or businesses, were required to be treated for LIFO inventory computations as separate items from substantially similar items that were subsequently acquired or produced within the acquired trades or businesses. Each bulk bargain purchase involved the acquisition of inventory for substantial discounts, thus leading the Tax Court to conclude that the acquired inventory possessed materially different cost characteristics from inventory acquired or produced after the trade or business acquisitions. Based on these materially different cost characteristics, the court held that the cost of the items acquired in each bulk bargain purchase could not be used as the base-year cost for substantially similar items subsequently acquired or produced. In addition, the court held that the taxpayer's inventory treatment of the bulk bargain purchases constitutes a method of accounting under section 446 and that any change in the inventory treatment of the bulk bargain purchases constitutes a change in method of accounting. The court also upheld the Service's application of an adjustment under section 481(a).

Taxpayers requesting the advance consent of the Commissioner to voluntarily change their method of accounting for bulk bargain purchases of inventory to a method consistent with that required by the Tax Court in Hamilton are required to file a current Form 3115, Application for Change in Accounting Method, with the Commissioner in accordance with section 1.446-1(e)(3)(i) of the Income Tax Regulations and Rev. Proc. 84-74, 1984-2 C.B. 736. For applications filed on or after November 7, 1991, the Service will require a section 481(a) adjustment to implement this LIFO inventory method change, and the provisions relating to Category B methods of accounting within Rev. Proc. 84-74 (or any successor document) will apply in determining the applicable adjustment period. In these cases, if the taxpayer's books and records do not contain sufficient information to accurately compute the section 481(a) adjustment and revalue LIFO inventories, the Service will generally permit the use of reasonable estimation procedures.

The principal author of this announcement is Wendy MacDonald of the Office of Chief Counsel (Income Tax and Accounting). For further information regarding this announcement, contact Wendy MacDonald on (202) 566-3762 (not a toll-free call).