Rev. Proc. 71-16 Amend. 1

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to amplify Revenue Procedure 71-16, C.B. 1971-1, 682, under which taxpayers may request that a positive adjustment resulting from the discontinuance of the last-in, first-out (LIFO) inventory method be spread ratably over a period of more than ten taxable years.

SEC. 2. BACKGROUND.

Revenue Procedure 71-16 provides an administrative procedure under which taxpayers who meet certain factual requirements may request permission to discontinue the use of the LIFO method of valuing inventories and spread the resulting positive adjustment over a period of more than ten years. Revenue Procedure 71-16 presently provides, as a condition to its application, that the LIFO method must have been used by the taxpayer continuously for six or more years prior to the year of change. It further provides that the Service may, in such a case, permit the positive adjustment to be allocated ratably over a period equal to twice the number of years during which the LIFO method was continuously used by the taxpayer, but in no event over a period longer than 20 years. The size of the adjustment is a factor which the Revenue Procedure specifies will be considered in arriving at the period over which the adjustment is to be allocated.

SEC. 3. PROCEDURE.

.01 The Service, in determining the period over which the positive adjustment may be allocated, will base its determination on the relationship of the taxpayer's LIFO reserve at the beginning of the taxable year of change to the average taxable income of the taxpayer for three preceding taxable years. In arriving at the average taxable income for the specific three preceding taxable years referred to in the prior sentence, the taxable income of the five taxable years immediately preceding the taxable year of change must first be determined. The high year and the low year of the five taxable years will be eliminated and the taxable income of the remaining three years will be added together and divided by three. The resulting amount is the average taxable income to be used.

.02 For this purpose, taxable income means taxable income before the net operating loss deduction but after special deductions as, for example, the deduction for dividends received. If the requesting corporation is a member of an affiliated group filing consolidated returns, the separate taxable income or loss of such corporation shall be used in computing the average taxable income referred to in .01, above.

.03 If the LIFO reserve, at the beginning of the taxable year of change, exceeds the average taxable income so determined the positive adjustment resulting from the change will be spread over a period equal to twice the number of taxable years the taxpayer has been continuously using the LIFO method, but in no event more than 20 taxable years.

SEC. 4. NONAPPLICATION OF THIS REVENUE PROCEDURE.

If a taxpayer's LIFO reserve is equal to or less than the average taxable income, as determined in 3.01, above, Revenue Procedure 71-16 does not apply. But see Revenue Procedure 69-11, C.B. 1969-1, 401.

SEC. 5. EFFECT ON OTHER DOCUMENTS.

Revenue Procedure 71-16 is amplified.