Rev. Rul. 75-181

The Internal Revenue Service has been asked to describe the proper use of certain retail price indexes by taxpayers engaged in the business of selling merchandise at wholesale and retail, who intend to adopt the last-in, first-out (LIFO) method of valuing inventories. The indexes in question are those prepared by the United States Bureau of Labor Statistics (BLS) such as the Consumer Price Indexes (CPI), Commodity Price Indexes and Wholesale Price Indexes (WPI).

Section 1.472-1(k) of the Income Tax Regulations provides that a taxpayer using the retail method of pricing inventories authorized by section 1.471-8 and who elects to use in connection therewith the LIFO inventory method shall adjust the inventory at year end valued on the retail method to the extent of price changes that have taken place after the close of the preceding year. The amount of the adjustment is to be determined by reference to price indexes acceptable to the Commissioner or, when applicable to the goods in question, price indexes prepared by the BLS may be used (emphasis added). Section 1.472-8(e)(1) regarding the methods of computing the LIFO value of a dollar-value pool provides, in part, that the appropriateness of the method of computing an index and the accuracy, reliability, and suitability of the use of such index must be demonstrated to the satisfaction of the district director. Section 1.472-8(e)(1) further provides that a taxpayer entitled to use the retail method of pricing LIFO inventories authorized by section 1.472-1(k) may use the retail price indexes prepared by the BLS.

Taxpayers engaged in various lines of the wholesale and retail business have apparently understood that they may use the BLS price indexes provided their inventories fall within one or more of the major group indexes prepared by the BLS rather than develop their own indexes from data based on their prices and quantities of inventory items.

Reference to the BLS price indexes referred to in the regulations had its origin in Mim. 6244, 1948-1 C.B. 21 (superseded by Rev. Proc. 72-21, 1972-1 C.B. 745), based upon the amendments to the regulations in T.D. 5605, 1948-1 C.B. 16. The BLS group index numbers of retail prices acceptable to the Commissioner are developed on a country-wide basis and are suitable for use by individual department stores that carry a reasonably full line of merchandise covering a reasonable field of the group included in the BLS index. The acceptability of the department store index figures is based upon specific arrangements with the Bureau of Labor Statistics to compute statistically sound index figures for retail department stores. At one time, similar arrangements were made by variety stores with the Bureau of Labor Statistics. See Rev. Rul. 54-63, 1954-1 C.B. 33, as modified by Rev. Rul. 55-220, 1955-1 C.B. 247.

It is not the intent of the regulations under section 1.472-1(k) and 1.472-8(e)(1) that taxpayers engaged in various lines of the wholesale and retail business may rely on BLS indexes such as CPI or WPI in lieu of developing their own indexes since such indexes are not designed for LIFO inventories of specific groups of wholesale or retail stores. The only group index numbers of retail prices that are recognized within the meaning of these sections of the regulations are the retail department store price indexes that are published semi-annually in the Internal Revenue Bulletin, and these are only acceptable for use by a retail store qualifying as a "department store" meeting the requirements of Rev. Rul. 23, 1953-1 C.B. 34.

Accordingly, except for department stores meeting the requirements of Rev. Rul. 23, BLS indexes will not be accepted by the Service in connection with the use of the LIFO method unless taxpayers can independently demonstrate the accuracy, reliability, and suitability of the use of such indexes to the satisfaction of the district director. In the absence of such a showing, taxpayers must develop their own indexes based upon sound statistical methods using their own specific data on prices and inventory quantities.

¹ Based on Technical Information Release 1342, dated January 27, 1975.