SERVICE ANNOUNCES THREE ADDITIONAL POOLS FOR DEPARTMENT STORE INVENTORY PRICE INDEXING
Rev. Proc. 86-46; 1986-2 C.B. 739
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Electronic Citation86 TNT 247-11
Rev. Proc. 86-46
SECTION 1. PURPOSE
The purpose of this revenue procedure is to modify and supersede Rev. Proc. 72-21, 1972-1 C.B. 745, which sets forth the groups or pools used by the United States Bureau of Labor Statistics (BLS) in preparing price indexes for use by department stores that have elected to use the last-in, first-out (LIFO) inventory identification method in conjunction with the retail method of valuing inventories.
SEC. 2. BACKGROUND
01. 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, elects to use in connection therewith the LIFO method authorized by section 472 of the Internal Revenue code, the apparent cost of the goods on hand at the end of the year, determined pursuant to section 1.471-8, shall be adjusted to the extent of price changes therein taking place after the close of the preceding tax year. The amount of any apparent inventory increase or decrease to be eliminated in this adjustment shall be determined by reference to acceptable price indexes established to the satisfaction of the Commissioner.
02. Price indexes prepared by BLS that are applicable to the goods in question are acceptable to the Commissioner under section 1.472-1(k) of the regulations. Monthly indexes are published by BLS and are subsequently published in the Internal Revenue Bulletin. The use of the BLS indexes is not mandatory. Indexes may be prepared by a taxpayer based upon its own data on prices and inventory quantities, subject to the provisions of section 1.472-1(k) of the regulations. Price indexes that are based upon inadequate records, or that are not subject to complete and detailed audit within the Internal Revenue Service, will not be approved.
03. Section 1.472-8(a) of the regulations provides that under the dollar-value LIFO method of valuing inventories, the goods contained in the inventory are grouped into a pool or pools. Section 1.472-8(g) provides that any method of pooling used in computing the taxpayer's LIFO inventories shall be treated as a method of accounting. Any method of pooling shall be used for the year of adoption and for all subsequent tax years unless a change is required by the Commissioner in order to clearly reflect income, or unless permission to change is granted by the Commissioner as provided in section 1.446-1(e). A taxpayer must secure the consent of the Commissioner under section 1.446-1(e)(2)(i) before it changes its method of accounting for federal income tax purposes.
04. Rev. Proc. 72-21 provides instructions and illustrations for the use of BLS indexes by a taxpayer who has elected to use the retail method of valuing inventories that are computed under the LIFO method. The last determination of the merchandise groups or pools for department stores was made by BLS in 1953, when 10 groups were added to the then existing 10 groups to reach the total of 20 groups set forth in Rev. Proc. 72-21.
05. The lines of merchandise typically carried by full-line retail department stores have expanded since the 20 major groups were last revised in 1953. For this reason, BLS will now publish monthly indexes for three new groups and a monthly index for the aggregate of these groups. These new groups are listed in section 4.01 of this revenue procedure.
06. Because the new indexes were introduced by BLS in February 1986, January 1987 will be the first month for which there will be a percent change based on a 12-month period. The January 1986 indexes for the new groups or pools are all 100.
07. Rev. Proc. 86-47, page 8, this Bulletin, sets forth the procedures required of taxpayers to change their method of accounting from that of using the 20 groups or pools set forth in Rev. Proc. 72- 21 to the method of using the 23 groups or pools set forth in this revenue procedure. Section 3.02 of Rev. Proc. 86-47 provides that its procedures, except as otherwise noted in section 3.03, apply to retail department stores (as described in section 3.01) for their first tax year ending on (or with referenct to) a date that is on or after January 31, 1987. Section 3.03 of Rev. Proc. 86-47 provides that if retail department stores (as described in section 3.01) do not have the records necessary to (1) calculate the cost complement for each new expanded pool, or (2) separate its miscellaneous pool or pools into the new expanded pools, its procedures apply to affected retail department stores for their first tax year beginning on (or with reference to) a date that is after January 31, 1987.
SEC. 3. SCOPE
This revenue procedure applies to retail department stores that (1) have elected to use the LIFO inventory identification method in conjunction with the retail method of valuing inventories, and (2) have elected to use the BLS department store price indexes published monthly by the Service.
SEC. 4. THE 23 GROUPS PROVIDED BY BLS
01. The following groups or combinations of groups are used by BLS as the basis for the preparation of indexes for use by department stores:
1. Piece Goods
2. Domestics and Draperies
3. Women's and Children's Shoes
4. Men's Shoes
5. Infants' Wear
6. Women's Underwear
7. Women's and Girl's Hosiery
8. Women's and Girl's Accessories
9. Women's Outerwear and Girl's Wear
10. Men's Clothing
11. Men's Furnishings
12. Boys' Clothing and Furnishings
13. Jewelry
14. Notions
15. Toilet Articles and Drugs
16. Floor Coverings
18. Housewares
19. Major Appliances
20. Radio and Television
21. Recreation and Education
22. Home Improvements
23. Auto Accessories
1-15: Soft Goods
16-20: Durable Goods
21-23: Miscellaneous Goods
SEC. 5. INSTRUCTIONS REGARDING THE USE OF INDEXES
01. As illustrated in sections 5 and 6 of this revenue procedure, in using the group indexes, a department store taxpayer must apply to the inventory data for each of its departments separately 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 department store.
02. When one or more departments of a department store do not fit into any one of the 23 major groups or into either of the special combinations listed in section 4.01 of this revenue procedure, an index shall be employed that represents an average for the whole of the remainder of the store. This index may be the store total, as shown by BLS, or the total for those of the 23 major groups (or combination of groups) that most closely represents the coverage of the inventory carried in the department or departments that require an index. For example, in a particular department that carries apparel, piece goods, and notions, the index may be the total of groups 1, 3, 4, 7, 8, 9, 10, 11, 12, and 14, or whichever combination most closely represents the coverage of the inventory stock carried by the store.
SEC. 6. ILLUSTRATION OF FIRST YEAR PRICE ADJUSTMENT
01. The method of making the first year price adjustments to the closing inventory values under the retail 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 the third department there was a decline in the physical quantity of inventory. In all three departments prices rose during the year, as shown by the index.
METHOD OF COMPUTING LIFO, RETAIL INVENTORY, THREE DEPARTMENTS, FIRST YEAR
Department No.
___________________________________
1
Women's
and 2 3
Step children's Men's Radio and
No. Item or computation shoes furnishings television
______________________________________________________________________
I. Data from
taxpayer's books
1 Opening inventory--
retail value $ 25,000 $ 40,000 $ 10,000
2 Opening inventory--
mark-on percent 43.6% 45.2% 44.1%
3 Opening inventory--
cost (1 reduced by 2) $ 14,100 $ 21,920 $ 5,590
4 Mark-on on year's purchase
(see step 12a) 44.7% 44.8% 44.6%
5 Closing inventory--
retail method $ 36,000 $42,000 $ 10,000
6 Closing inventory--
mark-on percent 44.4% 44.9% 44.4%
7 Closing inventory--
cost (FIFO) (5 reduced by 6) $ 20,016 $23,142 $ 5,560
II. Price Index Data
8 Price index, close of year
relative to prices at
beginning of first LIFO
Year as 100% 104.4% 103.4% 100.7%
III. LIFO Computations
9 Closing inventory--
adjusted retail value (5/8) $ 34,483 $ 40,619 $ 9,930
10 Increase (decrease) in
year (9-1) $ 9,483 $ 619 ($70)
11 Increase at current
prices (10 x 8) $ 9,900 $ 640
12a Cost of increase
(11 reduced by 4) $ 5,475 $ 353
12b Cost of decrease
(10 reduced by 2) ($39)
13 LIFO closing inventory
(3 + 12a or 3 - 12b) $ 19,575 $ 22,273 $ 5,551
______________________________________________________________________
NOTES
(a) The mark-ons in steps 2 and 4 must be computed taking account of mark-downs as well as mark-ups.
(b) In succeeding years the data to be used in steps 1, 2, and 3, to the extent applicable, must be taken from the taxpayer's books as of the beginning of the first year of the use of the LIFO method, and must be identical to those shown in the first year's computations.
(c) Steps 6 and 7 are shown to allow comparison of LIFO and FIFO inventories.
(d) The index in step 8 is the index of retail prices applicable to the goods in each department, showing the level of prices at the end of the year (104.4% in department 1) relative to the beginning of the year (100.0%).
SEC. 7. ILLUSTRATION OF SECOND AND THIRD YEAR ADJUSTMENTS
01. To illustrate further the principles involved in making adjustments for additional years the data for Department 1 are 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's 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.
02. 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.
METHOD OF COMPUTING LIFO, RETAIL INVENTORY
DEPT. NO. 1, FIRST THREE YEARS
______________________________________________________________________
Step First Second Third
No. Item or Computation year year year
______________________________________________________________________
I. Data from taxpayer's books
1 Opening inventory--
First LIFO year--retail $25,000 $25,000 $25,000
2 Opening inventory--First LIFO
year--mark-on percent 43.6% 43.6% 43.6%
3 Opening inventory--First LIFO
year--cost (1 reduced by 2) $14,100 $14,100 $14,100
4 Mark-on year's purchases 44.7% 44.8% 44.9%
5 Closing inventory given year--
retail value $36,000 $43,000 $34,000
II. Price Index Data
8 Price index, close of given
year relative to prices at
beginning of first LIFO
year as 100% 104.4% 107.2% 104.5%
III. LIFO Computations
9 Closing inventory--adjusted
retail value at price level
of opening inventory for
first LIFO year (5/8) $34,483 $40,112 $32,536
10 Increase over opening inventory
for first LIFO year (9 - 1) $ 9,483 $15,112 $ 7,536
a. Amount of increase
attributable to first year $ 9,483 $ 9,483 $ 7,536
b. Amount of increase
attributable to second year $ 5,629 0
11 Increase at prices existing
when acquired:
a. First year's increase
(10a x 104.4%) $ 9,900 $ 9,900 $ 7,875
b. Second year's increase
(10b x 107.2%) $ 6,035
12 Cost of increases:
a. First year's increase
(11a reduced by 44.7%) $ 5,475 $ 5,475 $ 4,339
b. Second year's increase
(11b reduced by 44.87%) $ 3,313
Add (3) above $14,100 $14,100 $14,100
13 LIFO closing inventory
(Sum of 12 and 3) $19,575 $22,888 $18,439
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SEC. 8. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 72-21 is modified and as modified is superseded.
SEC. 9. EFFECTIVE DATE
For taxpayers described in section 3.01 of Rev. Proc. 86-47, but not described in section 3.03 of Rev. Proc. 86-47, this revenue procedure is effective for tax years ending on (or with reference to) a date that is on or after January 31, 1987. For taxpayers described in sections 3.01 and 3.03 of Rev. Proc. 86-47, this revenue procedure is effective for tax years beginning on (or with reference to) a date that is after January 31, 1987.
Rev. Proc. 72-21 shall continue to be effective for tax years ending on (or with reference to) a date that is prior to January 31, 1987. For taxpayers described in sections 3.01 and 3.03 of Rev. Proc. 86-47, Rev. Proc. 72-21 shall continue to be effective for tax years beginning on (or with reference to) a date that is prior to January 31, 1987.
- Institutional AuthorsInternal Revenue Service
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Electronic Citation86 TNT 247-11