Rev. Proc. 71-16

SECTION 1. PURPOSE AND SCOPE.

.01 The purpose of this Revenue Procedure is to prescribe procedures under which taxpayers may request that a positive adjustment resulting from the discontinuance of the last-in, first-out (LIFO) inventory method may be spread ratably over a period of more than ten years.

.02 The words `positive adjustment' as used in this Revenue Procedure means the excess of (1) the inventory valuation at the beginning of the year of change under the new method over (2) the inventory valued at LIFO cost at the beginning of the year of change.

SEC. 2. BACKGROUND.

.01 In general, a taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner. See section 1.446-1(e)(2)(i) of the Income Tax Regulations. A change in the method of accounting includes a change in overall plan of accounting for gross income or deductions or a change in treatment of any material item used in such overall plan. See section 1.446-1(e)(2)(ii) of the regulations.

.02 In order to secure the Commissioner's consent to a change of a taxpayer's method of accounting, the taxpayer must file an application on Form 3115, Application for Change in Accounting Method, with the Commissioner of Internal Revenue, Attention: T:I:C, Washington, D.C. 20224, within 180 days after the beginning of the taxable year in which it is desired to make the change. See section 1.446-1(e)(3) of the regulations. Under Revenue Procedure 69-11, C.B. 1969-1, 401, the taxpayer may request that any positive adjustment be allocated ratably over ten years.

SEC. 3. PROCEDURE.

.01 Where a taxpayer requests permission from the Service to discontinue the LIFO inventory method and to adopt another method of valuing inventories consistent with the regulations, the taxpayer may, at the same time, request permission to allocate the positive adjustment over a period of longer than ten years provided the LIFO method has been used by the taxpayer continuously for six or more years prior to the year of change.

.02 In such a case, the Service may permit the positive adjustment to be allocated ratably over a period twice the number of years during which the LIFO method was continuously used by the taxpayer but in no event more than 20 years.

.03 Upon consideration of the application, the Service will determine the period of years over which the adjustment is to be allocated within the limitations prescribed in section 3.02, above. The size of the positive adjustment is one of the factors to be considered in arriving at the period of years over which the adjustment is to be allocated.

.04 The taxpayer's request relating to the allocation of the positive adjustment shall be made by a statement attached to the Form 3115, Application for Change in Accounting Method.

.05 This Revenue Procedure in no way changes any other determining factors which the Commissioner may take into consideration in granting permission for the discontinuance of the LIFO inventory method.

SEC. 4. EFFECT ON OTHER DOCUMENTS.

Revenue Procedure 69-11, C.B. 1969-1, 401, is modified.

SEC. 5. EFFECTIVE DATE.

This Revenue Procedure shall be effective for taxable years beginning after December 31, 1970.