Rev. Proc. 88-15

SECTION 1. PURPOSE

This revenue procedure allows certain taxpayers to obtain expeditious consent to discontinue the use of the last-in, first-out (LIFO) inventory method of accounting. Such discontinuation is a change in method of accounting within the meaning of sections 446 and 481 of the Internal Revenue Code. A taxpayer that complies with this revenue procedure has obtained the consent of the Commissioner to change its inventory method.

SEC. 2. BACKGROUND

.01 Section 446(e) of the Code states generally that a taxpayer that changes the method of accounting on the basis of which it regularly computes its income in keeping its books shall, before computing taxable income under the new method, secure the consent of the Secretary.

Section 1.446-1(e)(3)(i) of the Income Tax Regulations provides that, generally, 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, Washington, D.C., within 180 days after the beginning of the tax year for which the proposed change is to be made.

Section 1.446-1(e)(3)(ii) of the regulations states that the Commissioner may prescribe administrative procedures, subject to such limitations, terms, and conditions as deemed necessary to obtain consent, to permit taxpayers to change their accounting practices or methods to an acceptable treatment consistent with applicable regulations. Limitations, terms, and conditions, as may be prescribed in such administrative procedures by the Commissioner, shall include those necessary to prevent the omission or duplication of items includible in gross income or deductions.

.02 Section 481(a) of the Code requires that those adjustments necessary to prevent amounts from being duplicated or omitted be taken into account when the taxpayer's taxable income is computed under a method of accounting different from the method used to compute taxable income for the preceding tax year.

.03 Rev. Proc. 84-74, 1984-2 C.B. 736, contains procedures under section 1.446-1(e) of the regulations for obtaining the consent of the Commissioner to change a method of accounting for federal income tax purposes.

.04 Section 472(a) of the Code and section 1.472-3 of the regulations provide that a taxpayer may use the LIFO method in inventorying goods if the taxpayer files a statement with its income tax return for the tax year the method is first to be used. The statement shall be made on Form 970, Application to Use LIFO Inventory Method, in accordance with the form's instructions and the regulations under section 472.

.05 Section 472(e) of the Code and section 1.472-5 of the regulations provide that an election made to adopt and use the LIFO method is irrevocable. The method, once adopted, shall be used in all subsequent tax years, unless the use of another method is required by the Commissioner, or authorized pursuant to a written application filed as provided in section 1.446-1(e).

.06 Section 1.472-6 of the regulations provides that if a taxpayer is granted permission to discontinue the use of the LIFO inventory method or if the taxpayer is required by the Commissioner to discontinue the use of such method because the taxpayer did not conform to the requirements of section 1.472-2, the inventory of the specified goods for the first tax year affected by the change and for subsequent tax years shall be taken:

(a) In conformity with the method used by the taxpayer under section 471 of the Code for goods not included in its LIFO inventory computations; or

(b) If the LIFO inventory method was used by the taxpayer with respect to all of the taxpayer's goods, then in conformity with the inventory method used by the taxpayer prior to the taxpayer's adoption of the LIFO inventory method; or

(c) If the taxpayer did not use inventories prior to adoption of the LIFO inventory method and has no goods currently subject to inventory by a method other than the LIFO inventory method, then in conformity with such inventory method as may be selected by the taxpayer and approved by the Commissioner as resulting in a clear reflection of income; or

(d) In any event, in conformity with any inventory method to which the taxpayer may change pursuant to an application approved by the Commissioner.

.07 Section 472(c) of the Code requires a taxpayer using the LIFO inventory method to use no other procedure, in inventorying its goods to ascertain the income, profit, or loss of the first tax year for which the LIFO inventory method is to be used, for purposes of a report or statement covering such tax year to shareholders, partners or other proprietors, or beneficiaries, or for credit purposes. Section 472(e) extends this conformity requirement to subsequent tax years.

.08 Section 472(g)(1) of the Code provides that all members of the same group of financially related corporations shall generally be treated as one taxpayer for purposes of sections 472(c) and 472(e).

.09 Rev. Proc. 79-23, 1979-1 C.B. 564, lists certain situations that warrant the disallowance or termination of a LIFO election.

.10 Section 6.02 of Rev. Proc. 84-74 defines Category A methods of accounting as methods of accounting that are specifically not permitted to be used by the taxpayer by the Code, regulations, or a decision of the Supreme Court of the United States or certain methods that are clearly erroneous. Section 6.02(4)(10) of Rev. Proc. 84-74 states that an example of a Category A method is the use of the LIFO method of accounting for inventories when there has been a termination event (as described in Rev. Proc. 79-23 or any other applicable revenue ruling or revenue procedure) that occurred during a year not barred by the statute of limitations as of the date of the filing of the Form 3115.

.11 Section 1363(d) of the Code (as added by the Revenue Act of 1987) requires that if a C corporation uses the LIFO inventory method for its last tax year before an S election becomes effective, the LIFO recapture amount, as defined in section 1363(d)(3), shall be included in the gross income of the C corporation for such last tax year and that any increase in tax for the last taxable year as a C corporation shall be payable in 4 equal installments.

.12 Section 263A of the Code provides a uniform set of rules to be applied in determining the costs required to be included in inventory costs for tax years beginning after December 31, 1986. For the first tax year beginning after December 31, 1986, taxpayers that are required by section 263A to change their method of accounting may automatically change that method in accordance with the provisions of section 1.263A-1T(e)(11) of the temporary regulations. Taxpayers that are required to change their method of accounting and that fail to comply with the requirements of section 1.263A-1T(e)(11) are using an improper method of accounting.

SEC. 3. SCOPE

.01 Except as provided in section 3.02 below, this revenue procedure applies to any taxpayer that desires to (1) discontinue the use of the last-in, first-out (LIFO) inventory method for all of its LIFO inventory and (2) change to the permitted method determined in section 4.02(1) of this revenue procedure.

Taxpayers to which this revenue procedure applies may not use Rev. Proc. 84-74 for changes with respect to which this revenue procedure applies.

.02 This revenue procedure does not apply to:

(1) Any taxpayer that, as of the date of the filing of the Form 3115 with the National Office, has been contacted in any manner by a representative of the Service for the purpose of scheduling an examination of its federal income tax return(s) for any year, if the examination has not been completed, unless the taxpayer has obtained and attaches to its Form 3115 an agreement from the Service's examining agent that there is no objection to the proposed change in method of accounting;

(2) Any taxpayer that, as of the date of the filing of the Form 3115 with the National Office, is:

(a) Before an appeals office of the Service with respect to an examination of its federal income tax return(s) for any year, unless the taxpayer has obtained and attaches to its Form 3115 an agreement from the appeals officer that there is no objection to the proposed change in method of accounting, or

(b) Before any federal court with respect to an income tax issue arising in any year, unless the taxpayer has obtained and attaches to its Form 3115 an agreement from counsel for the Government that there is no objection to the proposed change in method of accounting;

(3) Any taxpayer that, as of the date of the filing of the Form 3115 with the National Office, is the subject of a criminal investigation or proceeding concerning (a) directly or indirectly the taxpayer's federal tax liability for any year, or (b) the possibility of false or fraudulent statements made by the taxpayer with respect to any issue relating to its federal tax liability for any year;

(4)(a) If the tax year preceding the year of change begins (or, pursuant to section 1.441-2(b)(1) of the regulations, is deemed to begin) after December 31, 1986, any taxpayer that, for that preceding tax year, uses an impermissible method of determining costs incurred in the production or acquisition of inventory property (in particular, any taxpayer whose method violates the provisions of section 263A of the Code and the regulations thereunder); or

(b) If the tax year preceding the year of change begins (or is deemed to begin) before January 1, 1987, any taxpayer that, for that preceding tax year, uses an impermissible method of determining costs incurred in the production or acquisition of inventory property, unless that taxpayer, for the year of change, changes that method according to the procedures prescribed in section 1.263A-1T(e)(11) of the temporary regulations (concerning a change to comply with section 263A of the Code);

(5) Any taxpayer for which, as of the date of the filing of the Form 3115 with the National Office, a termination event other than the one described in section 3.02(6) of this revenue procedure has occurred during a year not barred by the statute of limitations (For purposes of this revenue procedure, a "termination event" is a situation [as described in Rev. Proc. 79-23 or any other applicable revenue ruling or revenue procedure] that warrants the termination of a LIFO election; provided, however, that the term "termination event" does not include the issuance of nonconforming financial statements if the first such issuance occurs in the tax year in which the request to discontinue the LIFO inventory method is properly filed.);

(6) Any taxpayer that uses the LIFO inventory method and issues nonconforming financial statements in violation of section 472(g) of the Code for any tax year beginning on or after July 18, 1984, unless the first such issuance occurs in the tax year in which the request to discontinue the LIFO inventory method is properly filed;

(7) Any taxpayer that did not file Form(s) 970 to elect the LIFO inventory method and, if applicable, to extend the use of the LIFO method to other items of inventory (For a taxpayer that properly elected the LIFO inventory method but is unable to furnish a copy of the Form(s) 970, see section 7.06 of this revenue procedure.);

(8) A cooperative within the meaning of section 1381(a) of the Code that seeks to justify a section 481(a) adjustment period of more than 1 tax year; or

(9) Any taxpayer that filed a Form 3115 with the National Office under this revenue procedure or under Rev. Proc. 84-74 requesting permission to discontinue the use of the LIFO inventory method for an earlier tax year and that did not effect the requested change.

.03 Any taxpayer to which this revenue procedure does not apply and which desires to discontinue its use of the LIFO inventory method must file a current Form 3115 with the Commissioner in accordance with the requirements of section 1.446-1(e)(3) of the regulations and Rev. Proc. 84-74. If the year of change is the first tax year that the taxpayer is subject to section 263A of the Code and, in order to comply with the provisions of section 263A of the Code and the regulations thereunder, the taxpayer is also changing its method of accounting for determining costs incurred in the production or acquisition of inventory property, see Notice 88-23, page 490, this Bulletin.

SEC. 4. APPLICATION

.01 Consent. In accordance with section 1.446-1(e)(3)(ii) of the regulations, the requirement to file an application on Form 3115 within a 180-day period is waived, and under section 1.446-1(e)(2)(i) consent is hereby granted to any taxpayer within the scope of this revenue procedure to discontinue the use of the LIFO inventory method. This consent is granted for the tax year (year of change) for which a taxpayer requests a change by filing a current Form 3115 in the manner described in section 7 of this revenue procedure. See section 6 regarding compliance with the conditions of this revenue procedure.

.02 Method to be Used.

(1) The inventory method to be used by a taxpayer is determined as follows:

(a) If the taxpayer has inventoriable goods not included in its LIFO inventory computations (non-LIFO inventory) and, for all of the taxpayer's non-LIFO inventory, the taxpayer uses an inventory method that is a permitted method, as defined in section 4.02(2) of this revenue procedure, then the taxpayer must use that same inventory method for its entire inventory.

(b) If the LIFO inventory method is used by the taxpayer with respect to all of the taxpayer's inventoriable goods, then the taxpayer must use the same inventory method it used prior to the adoption of the LIFO inventory method if that prior method is a permitted method, as defined in section 4.02(2).

(c) If the taxpayer has only LIFO inventory and the method used by the taxpayer prior to the adoption of the LIFO inventory method is not a permitted method, as defined in section 4.02(2), then the taxpayer must use a method that is a permitted method, as defined in section 4.02(2).

(d) If the taxpayer had not used inventories prior to the adoption of the LIFO inventory method and has no inventoriable goods other than its LIFO inventory, then the taxpayer must use a permitted method, as defined in section 4.02(2).

(2) For purposes of this revenue procedure, a permitted method is a method under which:

(a) The identification method is either the first-in, first-out (FIFO) method or the specific identification method, and

(b) The valuation method is cost; cost or market, whichever is lower; market (but only if the taxpayer is a dealer in securities, as defined in section 1.471-5 of the regulations); the "farm-price method" or the "unit-livestock-price method" (but only if the taxpayer is a farmer permitted to use such methods); or the retail method, reduced to either approximate cost or approximate cost or market, whichever is lower (but only if the taxpayer is a retail merchant).

It should be noted that the average cost method (sometimes also referred to as "the rolling average method") described in Rev. Rul. 71-234, 1971-1 C.B. 148, is not a permitted method.

Whether an inventory method is a permitted method is determined by the taxpayer's method of inventory identification and valuation and not by which types and amounts of costs are capitalized under the taxpayer's method of computing inventory cost. See section 263A of the Code and the regulations thereunder, which govern the types and amounts of costs required to be included in inventory cost for taxpayers subject to its provisions.

.03 Section 481(a) Adjustment. The section 481(a) adjustment shall be taken into account in the manner set forth in section 5 of this revenue procedure.

.04 Conformity. For the year of change and for later tax years, the taxpayer must keep its tax books and records on the inventory identification and valuation method determined under section 4.02(1) of this revenue procedure. Further, it must use this method for all reports to shareholders, partners or other proprietors, or beneficiaries, including financial statements and statements for credit purposes. Notwithstanding the preceding sentence, costs that are required to be capitalized under section 1.263-A-1T(b) of the temporary regulations need not be capitalized in determining the cost of inventoriable goods in reports to shareholders, partners or other proprietors, or beneficiaries.

.05 Limitation on LIFO Election. The taxpayer may not elect the LIFO inventory method for a period of at least 10 tax years beginning with the year of change, unless, based on a showing of extraordinary circumstances, permission is requested, and consent is specifically granted by the Commissioner, to change the method of accounting at an earlier time. The request should comply with Rev. Proc. 84-74 and should be addressed to: Internal Revenue Service, Corporation Tax 4, Attn: CC:IND:D:C, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044.

SEC. 5. SECTION 481(a) ADJUSTMENT

.01 An adjustment, referred to as the section 481(a) adjustment, is required to prevent items from being duplicated or omitted when a change in method of accounting is made. The section 481(a) adjustment is the difference between (a) the value of the taxpayer's LIFO inventory as of the beginning of the year of change under the taxpayer's LIFO method (adjusted for any LIFO recapture amount previously included in gross income under section 1363 of the Code, if applicable) and (b) the value of that inventory under the method determined under section 4.02 of this revenue procedure. If the year of change is the taxpayer's first tax year that the taxpayer is subject to section 263A of the Code, the cost of the taxpayer's inventory under (b) shall generally be determined using the taxpayer's method for computing cost for the prior tax year. See Notice 88-23. (The difference between the cost of inventory under such prior tax year's method and the cost of inventory under the provisions of section 263A and the regulations thereunder is to be taken into account in accordance with the provisions of section 1.263A-1T of the temporary regulations.) If (b) is greater than (a), then the section 481(a) adjustment is referred to as a positive adjustment. If (a) is greater than (b), then the section 481(a) adjustment is referred to as a negative adjustment. The section 481(a) adjustment shall be taken into account in computing taxable income in the manner provided in section 5.02 below. For purposes of determining the amount of the section 481(a) adjustment, the approved change shall be considered a change in method of accounting initiated by the taxpayer; therefore, the section 481(a) adjustment is not to be reduced in any way by a pre-1954 amount.

.02 Section 481(a) Adjustment Period.

(1) The appropriate period (adjustment period) for taking into account the adjustment, whether positive or negative, referred to in section 5.01, is determined as follows:

(a) If the entire amount of the adjustment is attributable to the tax year immediately preceding the year of change (first preceding year), the total adjustment is to be taken into account in computing taxable income for the year of change. The amount attributable to the tax year immediately preceding the year of change is the amount of the adjustment determined under section 481(a) of the Code for the year of change less the amount of the adjustment that would have been required under section 481(a) if the same change in method of accounting had been made for such preceding year.

(b) If subparagraph (a) of this section 5.02(1) does not apply, the LIFO inventory method has been used for more than 4 tax years, and 67 percent or more of the adjustment is attributable to the 1-tax-year period, 2-tax-year period, or 3-tax-year period immediately preceding the year of change, the highest percent attributable to such 1-, 2-, or 3-tax-year period is to be taken into account ratably over a 3-tax-year period beginning with the year of change. Any remaining balance is to be taken into account ratably over an additional period equal to the remainder of the number of tax years the taxpayer has used the LIFO inventory method. However, the total adjustment period shall not exceed 6 tax years. The amount attributable to the 1-, 2-, or 3-tax-year period immediately preceding the year of change is the amount of the adjustment determined under section 481(a) of the Code for the year of change less the amount that would have been required under section 481(a) if the same change had been made at the beginning of such preceding 1-, 2-, or 3-tax-year period. If the LIFO inventory method has been used for 4 tax years, 75 percent shall be substituted for 67 percent.

(c) A cooperative within the meaning of section 1381(a) of the Code shall take the total amount of the adjustment into account in computing taxable income for the year of change. See Rev. Rul. 79-45, 1979-1 C.B. 284.

(d) In all other situations in which subparagraphs (a), (b), and (c) of this section 5.02(1) do not apply, the adjustment is to be taken into account ratably over the lesser of (i) the number of tax years the taxpayer has used the LIFO inventory method or (ii) 6 tax years.

(2) In applying section 5.02(1), if a taxpayer's books and records do not contain sufficient information to compute the section 481(a) adjustment that would have been required if the same change had been made at the beginning of such preceding 1-, 2-, or 3-tax-year period, the taxpayer may reasonably estimate these amounts, attach the computations upon which the estimates are based, and also sign and attach the following statement to the Form 3115:

Under penalties of perjury, I hereby certify that:

(a) The books and records of [name of the taxpayer] do not contain sufficient information to permit a computation of the section 481(a) adjustment attributable to the 1-tax-year period, 2-tax-year period, or 3-tax-year period immediately preceding the year of change as required by section 5.02(1) of Rev. Proc. 88-15.

(b) Based on the information that is contained in such records, to the best of my knowledge and belief, the entire amount of the section 481(a) adjustment for the year of change [indicate either "is" or "is not," as the case may be] attributable to the tax year immediately preceding the year of change, and 67 percent [or "75 percent," in applicable cases] or more of the section 481(a) adjustment for the year of change [indicate "is" or "is not," as the case may be] attributable to the 1-tax-year period, 2-tax-year period, or 3-tax-year period immediately preceding the year of change.

(3) For examples of the application of the rules prescribed in section 5.02(1) with respect to the appropriate period for taking into account the section 481(a) adjustment, see section 5.14 of Rev. Proc. 84-74.

.03 Inventory Reduction.

(1) If, on the last day of any tax year of the adjustment period, the value of the taxpayer's inventory to which the section 481(a) adjustment relates is reduced by more than 33-1/3 percent of the inventory value at the beginning of the first tax year of the adjustment period and is so reduced by at least such percentage at the end of the following tax year, the remaining balance of the section 481(a) adjustment must be taken into account in determining taxable income in the year succeeding the year of reduction. Permanent reductions, not temporary fluctuations, are controlling. If the value of the inventory does not remain reduced for one tax year, the reduction is not considered permanent, and the provisions of this paragraph do not apply. (For an example of the calculation, see section 5.08 of Rev. Proc. 84-74.)

(2) Section 5.03(1) shall not apply if the taxpayer shows to the satisfaction of the Commissioner that the reduction in inventory is attributable to a strike, involuntary conversion, or involuntary interruption of the availability of goods. Section 5.03(2) shall apply only if the taxpayer obtains the consent of the Commissioner to continue to spread the section 481(a) adjustment. The consent must be requested no later than 90 days after the end of the tax year in which section 5.03(1) would otherwise apply. The request should comply with section 5.08(2) of Rev. Proc. 84-74 and should be addressed to: Internal Revenue Service, Corporation Tax 4, Attn: CC:IND:D:C, P.O. Box 7604, Benjamin Franklin Station, Washington, D.C. 20044.

.04 Ceasing to Engage in the Trade or Business.

(1) With respect to a corporation:

If the corporation ceases to engage in the trade or business to which the adjustment described in section 5.01 relates at any time prior to the expiration of the adjustment period referred to in section 5.02, the taxpayer shall take into account in that year the balance of the adjustment not previously taken into account in computing taxable income. See Rev. Rul. 80-39, 1980-1 C.B. 112, which holds that in the case of a corporation with a different division for each trade or business, if the corporation ceases to engage in the trade or business of a division that has been granted a change in method of accounting, the remaining portion of the section 481(a) adjustment applicable to that trade or business must be taken into account in computing income in the year the corporation ceases to engage in that trade or business. For purposes of section 5.04, the taxpayer is not considered to have ceased to engage in a trade or business if its assets have been acquired by another corporation in a transaction to which section 381 of the Code applies, but in that case the acquiring corporation shall continue to be subject to this revenue procedure as though it were the acquired corporation.

(2) With respect to a partnership:

In the event a partnership terminates (within the meaning of section 708(b) of the Code) or ceases to engage in the trade or business to which the adjustment described in section 5.01 relates at any time prior to the expiration of the adjustment period referred to in section 5.02, the balance of the adjustment not previously taken into account in computing ordinary income shall be taken into account in that year. A partnership is treated as ceasing to engage in a trade or business upon the incorporation of the trade or business in a transaction to which section 351 of the Code applies (see Rev. Rul. 85-134, 1985-2 C.B. 160).

(3) With respect to a sole proprietor:

If an individual (sole proprietor) ceases to engage in the trade or business to which the adjustment described in section 5.01 relates at any time prior to the expiration of the adjustment period referred to in section 5.02, the balance of the adjustment not previously taken into account in computing taxable income shall be taken into account in that year. A sole proprietor is treated as ceasing to engage in a trade or business upon the incorporation of the trade or business in a transaction to which section 351 of the Code applies (see Rev. Rul. 77-264, 1977-2 C.B. 187). A sole proprietorship is not treated as ceasing to engage in a trade or business upon the sale of a partial interest in the proprietorship if the individual who was the sole proprietor continues to be actively engaged in the management of the business and it is subsequently operated as a partnership. The section 481(a) adjustment remaining at the time the partnership is formed is taken into account by the sole proprietor in computing the sole proprietor's own taxable income as though there had been no change in ownership (see Rev. Rul. 66-206, 1966-2 C.B. 206).

.05 Effect of Subchapter S Election by Corporation.

(1) If the taxpayer is described in section 5.05(1)(a) of this revenue procedure, the balance of the section 481(a) adjustment (not previously taken into account) must be taken into account in its last year as a C corporation. Any increase in the tax for the last year as a C corporation shall be payable as provided in section 5.05(1)(b).

(a) A taxpayer is described in this section 5.05(1)(a) if:

(i) The taxpayer is a C corporation for the year of change;

(ii) The section 481(a) adjustment is positive;

(iii) After December 17, 1987, the taxpayer makes an S election that is effective for one or more tax years in which, but for this section 5.05, some portion of the section 481(a) adjustment would have been taken into account; and

(iv) In the case of an election made before January 1, 1989, then, on or before December 17, 1987, there was neither (A) a resolution adopted by the board of directors of the taxpayer to make the S election nor (B) a ruling request with respect to the business filed with the Service expressing an intent to make such an election.

(b) If a taxpayer is described in section 5.05(1)(a) of this revenue procedure and if the inclusion of the balance of the section 481(a) adjustment results in any increase in tax for its last taxable year as a C corporation over the tax for its last taxable year as a C corporation over the tax that would have been due for that tax year if no portion of the section 481(a) adjustment had been so included, then that increase shall be payable as follows:

(i) Except as provided in (b)(iii), below, the increase shall be payable in equal installments, and the number of installments shall be the lesser of (A) 4, or (B) the number of tax years remaining in the portion of the adjustment period under section 5.02 starting with the taxpayer's last year as a C corporation.

(ii) The first installment shall be paid on or before the due date (determined without regard to extensions) for the income tax return for the taxpayer's last year as a C corporation, and, except as provided in (b)(iii) below, one installment (if any remain) shall be paid on or before the due date (determined without regard to extensions) for such corporation's income tax return for each succeeding tax year until all the installments are paid.

(iii) If, in the absence of this section 5.05, section 5.03 or 5.04 of this revenue procedure would have required the taxpayer to take into account in a single tax year the balance of the section 481(a) adjustment not previously taken into account, then any or all installment(s) that otherwise would have been due after the due date (determined without regard to extensions) for the taxpayer's income tax return for that tax year shall, instead, be paid on or before the due date (determined without regard to extensions) of such return.

(iv) For purposes of section 6601 of the Code (relating to assessment of interest on underpayment of tax), the date(s) prescribed for the payment of any installment(s) that are described in this section 5.05 shall be determined under section 5.05(1)(b)(ii) and (iii) of this revenue procedure.

(c) For example, assume that PJ corporation, a taxpayer that files returns on a calendar year basis, requests pursuant to section 4 of this revenue procedure to discontinue the use of LIFO inventory method for its tax year beginning January 1, 1989. Also assume that the section 48:(a) adjustment, calculated under section 5 of this revenue procedure, is $600 and will be taken into income by the corporation in 6 equal installments of $100 for the 1989-1994 tax years. If PJ corporation files an S election to be effective beginning January 1, 1990, then, pursuant to section 5.05(1) of this revenue procedure, PJ corporation must include the balance of the section 481(a) adjustment ($600) in income for its 1989 tax year. Any increase in tax imposed by reason of such inclusion is payable in four equal installments on or before the due dates (determined without regard to extensions) for the income tax returns of PJ corporation for its 1989-1992 tax years. If PJ corporation, instead, files an S election to be effective beginning January 1, 1993, it will have included $300 of the section 481(a) adjustment in income for its 1989-1991 tax years. Pursuant to section 5.05(1) of this revenue procedure, PJ corporation includes the remainder of the section 481(a) adjustment ($300) in income for its 1992 year. Any increase in tax imposed by reason of such inclusion is payable in three equal installments on or before the due dates (determined without regard to extensions) for the income tax returns of PJ corporation for its 1992-1994 tax years.

(2) If the taxpayer makes an S election that is first effective for the year of change, then, as provided in section 1363 of the Code, the taxpayer shall take the LIFO recapture amount (as defined in section 1363) into gross income for the taxpayer's last tax year as a C corporation (which is the year preceding the year of change). Any increase in income tax as a result of that inclusion shall be payable as provided in section 1363, that is, in 4 equal installments, beginning with the taxpayer's last tax year as a C corporation. As provided in section 1363, the taxpayer shall adjust the basis of its inventory as of the end of that last year as a C corporation to take into account the inclusion in income of the LIFO recapture amount. After having made this adjustment to basis, the taxpayer shall then calculate the section 481(a) adjustment, if any, according to the provisions of section 5.01 of this revenue procedure. If there is a section 481(a) adjustment (either positive or negative), the adjustment shall be taken into account as provided elsewhere in this section 5 (generally, over a period not to exceed 6 tax years, beginning with the year of change, which is the first tax year for which the S election is effective).

.06 Net Operating Loss Carryover and Net Operating Losses.

(1) No part of any (consolidated or separate) net operating loss carryover available at the beginning of the year of change may be used as an offset against the portion of the positive section 481(a) adjustment taken into account in the year of change. That is, the net operating loss carryover available at the beginning of the year of change may be offset only against income (other than the section 481(a) adjustment) generated in the year of change. This condition does not apply to years subsequent to the year of change. Any portion of the positive section 481(a) adjustment attributable to the year of change may be offset against any net operating loss otherwise incurred in the year of change as well as against any future net operating loss carryback under section 172(b) of the Code.

(2) Any portion of any net operating loss arising in the year of change or in any subsequent year in the adjustment period that is attributable to the negative section 481(a) adjustment may not be carried to those 3 tax years preceding the year of change to which section 172 of the Code otherwise would require it first to be carried.

.07 Credit Carryover. No part of any (consolidated or separate) credit carryover available at the beginning of the year of change may be used to reduce the federal income tax liability resulting from, or attributable to, the inclusion in income of a portion of the positive section 481(a) adjustment in the year of change. This restriction does not apply to a credit arising in the year of change or to any future credit carrybacks to the year of change.

SEC. 6. COMPLIANCE WITH CONDITIONS

If a taxpayer to which this revenue procedure applies discontinues the use of the LIFO inventory method without complying with all the conditions of this revenue procedure, then that taxpayer has made the change in inventory method without obtaining the permission of the Commissioner as required under section 446(e) of the Code.

SEC. 7. MANNER OF EFFECTING THE CHANGE

.01 The taxpayer applying for a change in method of accounting pursuant to this revenue procedure must complete and file a current Form 3115 in duplicate. A copy of the Form 3115 shall be filed with the National Office addressed to Internal Revenue Service, Corporation Tax 4, P.O. Box 7616, Benjamin Franklin Station, Washington, D.C. 20044. No user fee is required for an application filed under this revenue procedure.

The copy of the Form 3115 that is filed with the National Office must be filed within 270 days after the beginning of the year of change. The original of the Form 3115 shall be attached to the taxpayer's timely filed (determined with regard to extensions) federal income tax return for the year of change.

If the taxpayer is also changing its method of accounting for determining costs incurred in the production or acquisition of inventory property to comply with the provisions of section 263A of the Code and the regulations thereunder and if the year of change is the first tax year that begins (or is deemed to begin) in 1987 and that the taxpayer is subject to section 263A of the Code, then the following two requirements apply in lieu of those stated in the preceding paragraph. First, the copy of the Form 3115 must be filed with the National Office (1) within 270 days after the beginning of the year of change or (2) if later, on or before May 6, 1988, which is 60 days after the publication of this revenue procedure in the Internal Revenue Bulletin. Second, the original of the Form 3115 shall be attached to the taxpayer's original or amended federal income tax return for the year of change, provided that such return is filed no later than the 15th day of the 10th month following the close of the year of change.

.02 In order to assist in the processing of these changes in method of accounting and to insure proper handling, reference to this revenue procedure shall be made a part of the Form 3115 by either typing or legibly printing the applicable statement at the top of page 1 of Form 3115:

(1) For taxpayers complying with the provisions of sections 263A of the Code for the first tax year that begins (or is deemed to begin) in 1987 and that the taxpayer is subject to section 263A: "FILED UNDER NOTICE 88-23 AND REV. PROC. 88-15."

(2) For all other taxpayers: "FILED UNDER REV. PROC. 88-15."

.03 In addition to including all of the information required on the Form 3115, the taxpayer must (1) state that it agrees to all of the conditions of Rev. Proc. 88-15 and that it proposes to take the section 481(a) adjustment into account over the appropriate period required by section 5.02, and (2) identify the period over which the section 481(a) adjustment will be taken into account and the basis for concluding that the identified period is correct. If the Service finds that the taxpayer does not qualify for the change in method of accounting under this revenue procedure, the National Office or the district director will so advise the taxpayer.

.04 Termination Event Statement. The taxpayer must sign the following statement and attach it to the Form 3115:

Under penalties of perjury, I hereby certify that to the best of my knowledge and belief, with respect to [name of taxpayer]'s use of the LIFO inventory method, no termination event (as defined in section 3.02(5) of Rev. Proc. 88-15) has occurred during a year not barred by the statute of limitations as of the date of the filing of the Form 3115 with the National Office.

.05 Statement of Proposed Method. The taxpayer must complete the following statements and attach them to the Form 3115:

(1) The proposed method of identifying inventory goods will be the [insert method; i.e., specific identification; first-in, first-out; retail; etc.] method.

(2) The proposed method of valuing inventory goods will be [insert method; i.e., cost: cost or market, whichever is lower; etc.].

(3) This method conforms to the requirements of section 4.02(1) [insert either (a), (b), (c), or (d)] of Rev. Proc. 88-15 in that [explain in detail how the proposed method conforms to the specific subsection].

.06 The taxpayer must attach to the Form 3115 either (1) a copy of the Form(s) 970 filed to adopt the LIFO inventory method and, if applicable, to extend the use of the method, or (2) if the taxpayer properly elected the LIFO inventory method but is unable to furnish a copy of such Form(s) 970, the following statement, signed by the taxpayer:

Under penalties or perjury, I certify that to the best of my knowledge and belief, [name of taxpayer] properly elected the LIFO inventory method by filing a Form 970 with its return for the taxable year(s) ended [insert date(s)] and otherwise complied with the provisions of section 472(d) of the Code and 1.472-3 of the regulations.

.07 The signature of the person preparing the request for change in method of accounting must appear in the space provided for it on the Form 3115. The Form 3115 must be signed by or on behalf of the taxpayer requesting the change. For example, an officer must sign on behalf of a corporation, a general partner on behalf of a partnership, a trustee on behalf of a trust, or the individual taxpayer on behalf of a sole proprietorship. See the signature requirements set forth in the General Instructions attached to a current Form 3115 regarding those who are to sign. If an agent is authorized to represent the taxpayer before the Service, to receive the original or a copy of the correspondence concerning the request, or to perform any other act(s) regarding the application on behalf of the taxpayer, a power of attorney reflecting such authorization(s) must be attached to the application. A taxpayer's representative without a power of attorney to represent the taxpayer as indicated in this subsection will not be given any information regarding the application.

.08 If the taxpayer is a member of an affiliated group that has elected to file a consolidated federal income tax return, the Form 3115 submitted on behalf of the taxpayer must be signed by a duly authorized officer of the common parent. (See section 1.1502-77 of the regulations.)

.09 For early applications, except as stated below, see section 5.03 of Rev. Proc. 84-74. The statement (described in section 7.02 of this revenue procedure) to be typed or legibly printed at the top of page 1 of the Form 3115 should read: "EARLY APPLICATION FILED UNDER REV. PROC. 88-15." Within the first 270 days after the beginning of the year of change, the taxpayer must file with the National Office a copy of a complete and perfected Form 3115. The original of the complete and perfected Form 3115 is to be attached to the taxpayer's timely filed (determined with regard to extensions) federal income tax return for the year of change. Unlike the early application procedure under Rev. Proc. 84-74, the taxpayer will not be notified during the 270-day period if the early application has not been perfected.

SEC. 8. INQUIRIES

Inquiries regarding this revenue procedure may be addressed to the Commissioner of Internal Revenue, Attention: CC:C:4, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

SEC. 9. EFFECTIVE DATE

This revenue procedure is effective March 7, 1988, the date of its publication. Any request for change in method of accounting filed under the provisions of Rev. Proc. 84-74 that qualifies under this revenue procedure and is received in the National Office after the effective date will be returned to the taxpayer. Any taxpayer that has timely filed a Form 3115 under Rev. Proc. 84-74 with the National Office prior to the effective date of this revenue procedure and that has not filed its federal income tax return for the requested year of change may use the automatic provisions of this revenue procedure, if such taxpayer otherwise qualifies under this revenue procedure, and will be notified to this effect by the National Office.

SEC. 10. EFFECT ON OTHER DOCUMENTS

.01 As described below, sections 5.10(1)(b) and 6.02(4)(10) of Rev. Proc. 84-74 are modified to conform to sections 3.02(5) and 3.02(6) of this revenue procedure.

The following language is inserted above the final paragraph of section 5.10(1)(b) and as a new paragraph at the end of section 6.02(4)(10) of Rev. Proc. 84-74:

For purposes of this revenue procedure, a termination event does not include the issuance of nonconforming financial statements if the first such issuance occurs in the tax year in which the request to discontinue the LIFO inventory method is properly filed.

.02 The following language is inserted as new subparagraphs (c) and (d) of section 5.10(1) of Rev. Proc. 84-74:

(c) Condition relating to a subsequent S election. If the Commissioner approves a taxpayer's request to discontinue the use of the LIFO inventory method of accounting, the Commissioner will impose a condition consistent with the provisions of section 5.05(1)(b) of Rev. Proc. 88-15, applicable to taxpayers described in section 5.05(1)(a) of that revenue procedure (certain taxpayers making a subsequent S election).

(d) Taxpayer making an S election. If, after the effective date of section 1363(d) of the Code, the taxpayer makes an S election that is first effective for the year of change, then section 1363(d) requires both (i) an increase in the taxpayer's gross income for the tax year preceeding the year of change and (ii) a corresponding adjustment to the basis of the taxpayer's inventory as of the end of such preceeding tax year. This basis adjustment is taken into account in the computation of the section 481(a) adjustment that results from discontinuing the use of the LIFO inventory method. See section 5.05(2) of Rev. Proc. 88-15.