Rev. Proc. 76-8

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth certain circumstances under which a negative adjustment, determined under section 481 of the Internal Revenue Code of 1954, may be taken into account over a period of less than 10 years by a taxpayer changing to the full absorption method of inventory costing.

Sec. 2. Scope.

This Revenue Procedure is applicable to any taxpayer that makes an election to change to the full absorption method of inventory costing from a method more inclusive of indirect production costs in accordance with section 1.471-11(e)(4)(i) of the Income Tax Regulations.

Sec. 3. Background.

.01 Section 1.471-11(e)(1)(i) of the regulations provides, in part, that a taxpayer not using the full absorption method of inventory costing as prescribed by paragraph (a) of section 1.471-11 must change to that method.

.02 Section 1.471-11(e)(1)(ii) of the regulations provides a special election to change to the full absorption method of inventory costing during the two-year "transition period." Such election is required to be made during the first 180 days of any taxable year beginning on or after September 19, 1973, and before September 19, 1975, or such later date as may be prescribed by the Commissioner of Internal Revenue.

.03 Section 1.471-11(e)(4)(i) of the regulations provides, that where a taxpayer changes to the full absorption method of inventory costing from a method of inventory costing which is more inclusive of indirect production costs, and where the taxpayer has not previously changed to the method presently being employed by use of the special transition rules provided by sections 1.471-11(e)(1), (2) and (3), the taxpayer may elect on Form 3115 to change to the full absorption method of inventory costing and, in so doing, take into account any resulting section 481 adjustment generally over 10 taxable years commencing with the year of transition. Such election must be made within the transition period described in section .02 above. The "resulting section 481 adjustment" referred to in section 1.471-11(e)(4)(i) of the regulations is sometimes referred to as a "negative section 481 adjustment," i.e., an adjustment which reduces taxable income.

.04 The purpose of the transition rules, under section 1.471-11(e) of the regulations, is to make changes to the full absorption method of inventory costing a mandatory requirement during the transition period and, in connection therewith, to provide reasonable transition methods. Section 1.471-11(e)(4)(i) requires a taxpayer to take section 481 adjustments into account generally over a period of 10 years. The purpose of this Revenue Procedure is to provide criteria under which the negative section 481 adjustment may be taken into account over a period of less than 10 years.

Sec. 4. Implementation.

Where a taxpayer changes to the full absorption method of inventory costing under section 1.471-11(e)(4)(i) of the regulations from a more inclusive method of inventory costing, the period referred to in section 3.04 of this Revenue Procedure over which the negative adjustment may be taken into account, shall be determined as follows:

Where the taxpayer has been in existence for less than ten taxable years or has used the accounting practice that is being changed for less than ten taxable years, then generally such lesser number of years will be the number of years over which the adjustment is taken into account.

Sec. 5. Inquiries.

Inquiries in regard to this Revenue Procedure should refer to its number and should be addressed to the Commissioner of Internal Revenue, Attention T:C:C, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

¹ Also released as TIR-1437 dated Jan. 22, 1976.