SERVICE ISSUES GUIDANCE RELATING TO DISCONTINUANCE OF LIFO METHOD OF ACCOUNTING.

Notice 88-23

The purpose of this notice is to advise taxpayers of an anticipated change in the regulations under section 263A of the Code relating to the ordering rules applicable to changes in methods of accounting for taxable years beginning in 1987. This notice applies only with respect to a taxpayer changing its method of accounting in order to comply with the requirements of section 263A for the first taxable year beginning after December 31, 1986, if, for the same taxable year, the taxpayer also wishes to discontinue its use of the last-in, first-out ("LIFO") method of accounting for inventories.

ORDERING RULES

In general, as provided in section 1.263A-1T(e)(11)(v) of the Income Tax Regulations, the change in method of accounting required by section 263A of the Code shall be deemed to occur (including the computation of the adjustment under section 481(a) of the Code) before any other change in method of accounting is deemed to occur for the year of change. However, forthcoming regulations interpreting section 263A of the Code will modify this rule and provide that, in the case of a taxpayer that wishes to terminate the use of the LIFO method of accounting for inventories, the change from the LIFO method may, if the taxpayer chooses, be made before the change in method of accounting for inventories (and the computation of the corresponding adjustment under section 481(a) of the Code) required by section 263A of the Code is made. In addition, a taxpayer making such change in method of accounting may be permitted to use the expeditious procedure for discontinuing the use of the LIFO method of accounting for inventories contained in Rev. Proc. 88-15, published in this issue of the Internal Revenue Bulletin.

Taxpayers that are required to change their method of accounting for inventories under section 263A, and

(i) are not eligible to utilize the provisions of Rev. Proc. 88-15, or

(ii) have filed a Federal income tax return for the first taxable year beginning after December 31, 1986, before 30 days after the publication of this notice in the Internal Revenue Bulletin,

shall be treated as having timely filed for a change in method of accounting to discontinue the use of the LIFO method for their first taxable year beginning after December 31, 1986, if a Form 3115 is filed with the National Office by the later of: (a) the 180th day of the first taxable year beginning after December 31, 1986, or (b) May 6, 1988, 60 days after the publication of this notice in the Internal Revenue Bulletin. Any such request for change in method of accounting shall be considered by the Service under the provisions of Rev. Proc. 84-74, 1984-2 C.B. 736. Reference to this notice and Rev. Proc. 84-74 should be made by either typing or legibly printing the following statement at the top of page 1 of Form 3115: "FILED UNDER NOTICE 88-23 AND REV. PROC. 84-74".

PROCEDURAL INFORMATION

This notice serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

DRAFTING INFORMATION

The principal author of the notice is Paulette C. Galanko of the Legislation and Regulations Division. For further information regarding this notice, contact Ms. Galanko at (202) 566-3238 (not a toll-free call).