Rev. Proc. 74-2

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth certain circumstances under which a taxpayer will be considered to have made a valid election to use the last-in, first-out (LIFO) method of inventory valuation even though the requisite Form 970 (Application to Use LIFO Inventory Method) is not filed with the timely filed Federal income tax return for the taxable year as of the close of which the method is first to be used.

Sec. 2. Background.

Section 1.472-3(a) of the Income Tax Regulations, as amended by T.D. 7295, page 123, this Bulletin, 38 F.R. 34203, dated December 12, 1973. provides that the LIFO inventory method may be adopted and used only if the taxpayer files with his income tax return for the taxable year as of the close of which the method is first to be used a statement of his election to use such inventory method. Such statement shall be made on Form 970 pursuant to the instructions printed with respect thereto and the requirements of this section, or in such other manner as shall be acceptable to the Commissioner of Internal Revenue. Such statement shall be accompanied by an analysis of all inventories of the taxpayer as of the beginning and the end of the taxable year for which the LIFO inventory method is proposed first to be used, and also as of the beginning of the prior taxable year.

Section 1.472-3(a) of the regulations also provides that, in the case of a manufacturer, the analysis shall show in detail the manner in which costs are computed with respect to raw materials, goods in process, and finished goods, segregating the products into natural groups on the basis of either (1) similarity in factory processes through which they pass, or (2) similarity of raw materials used, or (3) similarity in size, style, shape, or use of the finished products.

Sec. 3. Circumstances.

In some instances returns have been filed containing all of the information required under section 1.472-3(a) of the regulations (including the information required in the instructions on Form 970) and the Federal income tax return reflected an election to use the LIFO method of inventory valuation. However, the requisite Form 970 was not filed with the return. Under such circumstances, the question arises whether the Commissioner will accept such election as valid even though Form 970 is not filed with the return.

Sec. 4. Procedure.

.01 The Internal Revenue Service will consider a taxpayer's "election" to use the LIFO method of valuing inventories as acceptable, even though the requisite Form 970 is not filed with the Federal income tax return for the taxable year for which the "election" is made, if the taxpayer included all of the information required on, or to be filed with, Form 970 on his timely filed Federal income tax return for the taxable year as of the close of which the LIFO method is first to be used.

.02 The above does not affect the Commissioner's rights (1) under section 1.472-3(b) of the regulations, to request other detailed information, (2) under section 1.472-3(c), to require that LIFO be used with respect to goods other than those specified in the taxpayers statement of election, and (3) under 1.472-3(d), with respect to the propriety of all adjustments upon examination of the taxpayer's income tax returns.

Sec. 5. Inquiries.

Inquiries regarding this Revenue Procedure may be addressed to the Commissioner of Internal Revenue, Attention: T:I:C, 1111 Constitution Avenue, N.W., Washington, D. C. 20224.