Rev. Rul. 77-480

Rev. Rul. 77-480

Advice has been requested whether, under the circumstances described below, the moving average method of determining current-year cost is a proper method within the meaning of section 1.472-8(e)(2) of the Income Tax Regulations.

The taxpayer elected the last-in, first-out (LIFO) inventory method beginning with its taxable year that ended on December 31, 1976. On its Form 970 (Application to Use LIFO Inventory Method), the taxpayer elected to use an average cost method as described in section 1.472-8(e)(2)(ii)(c) of the regulations for determining the total current-year cost of its dollar-value LIFO inventory. In computing the current-year cost for the year of the LIFO election and subsequent years, the taxpayer used a moving average cost method. Under the moving average method, however, the taxpayer added the cost of the units in inventory at the end of the prior year plus the cost of units purchased during the current year and divided that sum by the sum of the total number of units on hand at the end of the prior year plus the number of units purchased during that year. The resulting quotient was used as the average cost in determining the total current-year cost of the LIFO inventory.

Section 472(b)(2) of the Internal Revenue Code of 1954 provides that a taxpayer electing to use the LIFO method of inventory valuation must value such inventory at its cost.

Section 1.472-8(a) of the regulations provides that any taxpayer may elect to determine the cost of its LIFO inventories under the "dollar-value" method provided such method clearly reflects income.

Section 1.472-8(e) of the regulations provides several authorized methods of computing dollar-value pools. Section 1.472-8(e)(2)(ii) provides that the total current-year costs making up a pool may be determined either (a) by reference to the actual cost of the goods most recently purchased, (b) by reference to the actual cost of the goods purchased during the taxable year in order of acquisition, (c) by application of an average unit cost equal to the aggregate cost of all the goods purchased throughout the taxable year divided by the total units so purchased, (d) or pursuant to any other method that clearly reflects income.

The methods of determining the current-year cost of a dollar-value pool under section 1.472-8(e)(2)(ii) of the regulations contemplate the determination of current-year cost to be made on a year-by-year basis by using costs applicable to the current year. The moving average method in the instant situation uses costs from prior years as well as the current year and as a result does not present a true current-year cost.

Accordingly, the moving average method of determining current-year cost described above is not a proper method within the meaning of section 1.472-8(e)(2)(ii)(c) of the regulations. Because the taxpayer elected to use the average unit cost method for LIFO purposes, this method must be used for all years in which the LIFO method is used.