Rev. Proc. 72-21

Section 1. Purpose.

The purpose of this Revenue Procedure is to provide instructions and illustrations for the use of price indices by a taxpayer who has elected to use the last-in, first-out (LIFO) inventory method with respect to the retail method of pricing inventories.

Sec. 2. Background.

Section 1.472-1(k) of the Income Tax Regulations provides that if a taxpayer using the retail method of pricing inventories, authorized by section 1.471-8 of the regulations, elects to use in connection therewith the LIFO inventory method authorized by section 472 of the Internal Revenue Code of 1954, the apparent cost of the goods on hand at the end of the year, determined pursuant to section 1.471-8 of the regulations, shall be adjusted to the extent of price changes therein taking place after the close of the preceding taxable year. The amount of any apparent inventory increase or decrease to be eliminated in this adjustment shall be determined by reference to acceptable price indices established to the satisfaction of the Commissioner. Price indices prepared by the United States Bureau of Labor Statistics which are applicable to the goods in question will be considered acceptable to the Commissioner. Price indices which are based upon inadequate records, or which are not subject to complete and detailed audit within the Internal Revenue Service, will not be approved.

The use of such indices of the Bureau of Labor Statistics is not mandatory; as indicated above, indices may be prepared by an individual taxpayer based upon his own data on prices and inventory quantities subject to the provisions of section 1.472-1(k) of the regulations.

Semiannual indices for January and July of each year are published by the Bureau of Labor Statistics in March and September of each year. Indices as of the 15th of a month will be deemed to be representative of prices at either the beginning or end of such month. These releases of the Bureau of Labor Statistics are also published in the Internal Revenue Bulletin.

Sec. 3. Indices Provided by the Bureau of Labor Statistics.

The following groups have been used by the Bureau of Labor Statistics as the basis for the preparation of the indices for past years for use by department stores:

     I Piece Goods

In using such group indices, a department store taxpayer will apply to the inventory data for each of his departments separately, as illustrated in sections 5 and 6 of this Revenue Procedure, the index for the group in which the department logically belongs. A given group index may be applicable to a number of departments in a store.

When a department does not fit into any one of the 20 major groups or into either of the two special combinations named in section 3 of this Revenue Procedure, an index should be employed which represents an average for the whole of the remainder of the store. For example, this index may be the store total, as shown by the Bureau of Labor Statistics, or shown for apparel, piece goods, and notions combined (groups I, III, IV, VII, VIII, IX, X, XI, XII, and XIV), whichever of these combinations more closely represents the coverage of the inventory stock carried by the store.

Sec. 5. Illustration of First Year Price Adjustment.

The method of making the first year price adjustments to the closing inventory values under the retail inventory method, combined with the LIFO method, is illustrated for three hypothetical departments. In the first two departments there was an increase in the physical quantity of inventory during the year in question, as shown by the comparison of the adjusted retail value at the end of the year and the retail value at the beginning of the year. In all three departments prices rose during the year, as shown by the index. In the third department there was a decline in the physical quantity of inventory.

 Method of Computing LIFO, Retail Inventory, Three Departments,

To illustrate further the principles involved in making adjustments for additional years the data for Department 1 is shown below, the first year being repeated to show the continuity. The physical quantity of inventory increased in the first two years, but decreased in the third year, as indicated by the adjusted retail values (Line 9). Note that the decrease in the third year eliminated all of the second year increase, and part of the first year's increase, in that order, retaining in the closing inventory the merchandise appearing in the opening inventory "in the order of acquisition" (Line 10). Thus, it is necessary under the LIFO method to retain the identity of each annual increment to the inventory of each department. The price changes are measured by reference to the fixed prices at the beginning of the first LIFO year and the retail inventory value on each inventory date is adjusted to the price level on that date. These illustrations are intended to show the main principles involved in the LIFO adjustments to retail inventories, and are not intended to cover all accounting details of computations which may be required particularly in later years, under the LIFO method.

Sec. 7. Effect on Other Documents.

Mimeograph 6244, C.B. 1948-1, 21, is superseded, since the position set forth therein is restated under the current statute and regulations in this Revenue Procedure.

      Method of Computing LIFO, Retail Inventory Department No. 1,