Rev. Rul. 54-63

The purpose of this Revenue Ruling is to describe the set of special retail price indexes which have been prepared by the United States Bureau of Labor Statistics (sometimes hereinafter referred to as BLS) representing price changes in the inventories carried by variety stores, and the conditions under which the use of these indexes will be acceptable in the filing of income tax returns of taxpayers employing the elective inventory method of section 22(d) of the Internal Revenue Code.

For the purpose of this Revenue Ruling the term `variety stores,' following the practice of the United States Bureau of the Census, is defined as meaning retail establishments primarily engaged in selling a variety of merchandise in the low and popular price ranges, such as stationery, gift items, women's accessories, toilet articles, light hardware, toys, housewares, confectionery, etc. These stores frequently are known as `5 and 10 cent' stores and `5 cents to a dollar' stores, although merchandise is usually sold outside these price ranges. Sales usually are made on a cash-and-carry basis, with the open selling method of display and customer selection of merchandise. (U.S. Census of Business-1948, Trade Series, Variety Stores; Bureau of the Census, Bulletin No. 3-3, p. 4.)

As described in Mimeograph 6244, C.B. 1948-1, 21, the Internal Revenue Service has accepted, for use by individual department store taxpayers on a countrywide basis, the department store inventory price indexes, prepared and published semiannually by the United States Bureau of Labor Statistics for this purpose, in connection with the filing of income tax returns employing the elective inventory method.

Arrangements have now been made by representatives of the limited price variety stores to have the Bureau of Labor Statistics prepare and publish semiannually a similar set of index numbers representing retail price changes of groups of departmental inventories of variety stores, exclusive of food, candy, and tobacco departments. Subject to proper application under the elective inventory method, as described below, these BLS variety store inventory price indexes will be accepted by the Internal Revenue Service on a countrywide basis for use by individual variety stores employing the retail inventory method, as representing price changes for the respective departments covered by such group indexes.

The use of such indexes published by the Bureau of Labor Statistics is not mandatory; indexes may be prepared by an individual taxpayer based upon his own data on prices and inventory quantities, if adequate, and if proof is submitted that sound statistical methods have been employed that assure reliable indexes, not only for the particular year in question, but for subsequent years. There may be no selective use of such indexes, however, combining the use of certain of the BLS indexes with respect to given departments and the use of other individual indexes with respect to other departments, except in the case of food, candy, and tobacco departments. Neither will alternate use of BLS indexes and individual indexes in successive taxable years be permitted.

Both for purposes of the application of the elective inventory method itself, and for the use of the published indexes, it is essential that only reasonably homogeneous or similar goods be included in each dollar value pool or department. It is also essential to employment of the published BLS indexes that goods be included in each department or LIFO pool that have been included by the BLS in the construction of the indexes. The classifications shown in table II have been proposed by representatives of the trade, to represent a reasonable minimum standard departmentalization of similar goods. If a taxpayer has consistently maintained merchandising records, for purposes of the retail inventory method, of more detailed subdivisions than the 27 departments listed, these should be retained as the basis of LIFO pools. On the other hand, however, no broader LIFO pools will be accepted than the 27 individual departments listed. A taxpayer will not be permitted, for example, to set up a LIFO pool consisting of departments 1 and 2 together, piece goods and domestics. Merchandise records will be required which will allow the identification of inventory values, purchases, net markon, etc. for piece goods and domestics separately. In applying the BLS indexes under the elective inventory method, a variety store taxpayer will employ each group index with respect to each of the individual departments named thereunder.

As is the case with other taxpayers, a variety store must specify (in its application to use the elective inventory method) which goods shall be included under the method, and may omit the goods in certain departments. If a taxpayer wishes, however, to use the BLS variety store inventory price indexes, this election must be made with respect to all departments under a single group index. Since each group index has been designed to be representative of the price movements of all the departments included thereunder, a group index will not be considered to be representative of only a portion of the departments to the exclusion of others. For example, if a taxpayer wishes to specify piece goods (department 1 in group I) as included under the elective method, domestics and laces and ribbons (departments 2 and 3 in group I) must also be specified if carried by the taxpayer. At the same time, however, the five departments under group index II may be omitted from such specification.

Similarly, a taxpayer may specify in connection with its election to include only store stocks (countertop, undercounter, and stockroom inventories) and exclude warehouse stocks. In order to invoke the provisions of section 22(d)(6) of the Internal Revenue Code, however, relating to the involuntary liquidation and replacement of inventory, stocks of similar goods in all locations, including warehouse stocks, must be considered together.

As provided in Treasury Decision 5605, C.B. 1948-1, 16, since the elective inventory method requires the use of cost, the retail selling prices must be adjusted, through the annual departmental markon percentages, for markdowns as well as markups. In other words, net markons rather than gross markons must be employed in deriving the cost of a departmental inventory from its retail value. The method of applying retail price indexes to three hypothetical departments under the retail inventory method and the elective inventory method is illustrated in exhibits A through D of Mimeograph 6244, supra .

The BLS variety store inventory price indexes will represent price changes semiannually, as of June 15 and December 15. Such indexes will be considered as representative of either the beginning or end of such months. The indexes are expected to be published by the BLS about the first of September and March, respectively, and will be reproduced subsequently in the Internal Revenue Bulletin. The indexes for June 1953 on a base of December 1952 as 100, are reproduced below.

             BUREAU OF LABOR STATISTICS, VARIETY STORE