Rev. Rul. 79-58

ISSUE

Does Rev. Proc. 75-10, 1975-1 C.B. 651, permit disclosure in a calendar year consolidated financial statement of the effect on income of an acquired member's change to the LIFO inventory method in a short taxable period when such financial statement includes and extends operations beyond the short taxable period of election?

FACTS

X corporation files its federal income tax return on a calendar year basis and on May 1, 1976, acquired Y corporation which used a January 31 taxable year. In order to file a consolidated return for December 31, 1976, with X, Y was required to change its taxable year to a calendar year under the provisions of section 1.1502-76(a)(1) of the Income Tax Regulations. Pursuant to the provisions of section 1.1502-76(b)(1) and (2), Y filed a separate return for the period February 1, 1976, through April 30, 1976, and Y's operations for the period May 1, 1976, through December 31, 1976, were included in the consolidated return filed by X for the calendar year. Y elected the last-in, first-out inventory method on the separate tax return for the period February 1, 1976, to April 30, 1976. Y changed its year end for financial statement purposes and Y's earnings, based on LIFO, were included in the consolidated financial statements of X for the period February 1, 1976, through December 31, 1976. In addition, on the basis of financial statement disclosure requirements discussed in Rev. Proc. 75-10, 1975-1 C.B. 651, the Securities and Exchange Commission (S.E.C.) required that X disclose in its consolidated financial statements for the year ending December 31, 1976, the effect on income for that year resulting from Y's change to LIFO.

LAW AND ANALYSIS

Section 472(c) and (e) of the Code provides that a taxpayer may not use the LIFO inventory method unless it is established to the satisfaction of the Secretary that the taxpayer used no procedure other than the LIFO method for purposes of finding earnings shown in an annual report to shareholders, partners, other proprietors, beneficiaries, or for credit purposes.

Rev. Proc. 75-10 provides that a LIFO election will not be terminated solely because a taxpayer discloses information consistent with certain requirements of the S.E.C., the Financial Accounting Standards Board, and Accounting Principles Board Opinions that require that footnotes or commentary on annual reports and financial statements disclose the effect of the change in method on income provided such disclosure is made solely for the year of the change.

The disclosures permitted by Rev. Proc. 75-10 must be consistent with reporting requirements of the S.E.C., the Financial Accounting Standards Board, and Accounting Principles Board Opinions discussed in Rev. Proc. 75-10 and it is limited to the year of the LIFO election. In the present situation, the year of the LIFO election for federal income tax purposes is the period covered by Y's separate return for the period February 1, 1976, through April 30, 1976. However, for financial statement purposes the year of the LIFO election is the year ended December 31, 1976. The required disclosures authorized by Rev. Proc. 75-10, must be included in the financial statements for the year ended December 31, 1976, because that was the year of the LIFO election for financial statement purposes.

HOLDING

The disclosure permitted by Rev. Proc. 75-10 includes disclosure in a calendar year consolidated financial statement of the effect on income of an acquired member's change to the LIFO inventory method in a short taxable period included within such calendar year financial statement.