Treasury Regulations · 26 CFR
§ 1.472-8. Dollar-value method of pricing LIFO inventories.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 472
Cite as 26 CFR § 1.472-8
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- January 20, 1961 by T.D. 6539
- Last amended
- unknown
- Issued under
- 26 U.S.C. § 472
- Length
- 19,675 words · about 86 min to read
- Cross-references
- cites 4 Code sections and 4 regulations; cited by 8
A corporation manufactures, in one division, automatic clothes washers and driers of both commercial and domestic grade as well as electric ranges, mangles, and dishwashers. The corporation manufactures, in another division, radios and television sets. The manufacturing facilities and processes used in manufacturing the radios and television sets are distinct from those used in manufacturing the automatic clothes washers, etc. Under these circumstances, the enterprise would consist of two business units and two pools would be appropriate, one consisting of all of the LIFO inventories entering into the manufacture of clothes washers and driers, electric ranges, mangles, and dishwashers and the other consisting of all of the LIFO inventories entering into the production of radio and television sets.
A taxpayer produces plastics in one of its plants. Substantial amounts of the production are sold as plastics. The remainder of the production is shipped to a second plant of the taxpayer for the production of plastic toys which are sold to customers. The taxpayer operates his plastics plant and toy plant as separate divisions. Because of the different product lines and the separate divisions the taxpayer has two natural business units.
A taxpayer is engaged in the manufacture of paper. At one stage of processing, uncoated paper is produced. Substantial amounts of uncoated paper are sold at this stage of processing. The remainder of the uncoated paper is transferred to the taxpayer's finishing mill where coated paper is produced and sold. This taxpayer has only one natural business unit since coated and uncoated paper are within the same product line.
(b) Raw materials which are substantially similar shall be pooled together in accordance with the principles of this subparagraph. However, inventories of raw or unprocessed materials of an unlike nature may not be placed into one pool, even though such materials become part of otherwise identical finished products.
(c) Finished goods and goods-in-process in the inventory shall be placed into pools classified by major classes or types of goods. The same class or type of finished goods and goods-in-process shall ordinarily be included in the same pool. Where the material content of a class of finished goods and goods-in-process included in a pool has been changed, for example, to conform with current trends in an industry, a separate pool of finished goods and goods-in-process will not ordinarily be required unless the change in material content results in a substantial change in the finished goods.
(d) The requirement that pools be established by major types of materials or major classes of goods is not to be construed so as to preclude the establishment of a miscellaneous pool. Since a taxpayer may elect the dollar-value LIFO method with respect to all or any designated goods in his inventory, there may be a number of such inventory items covered in the election. A miscellaneous pool shall consist only of items which are relatively insignificant in dollar value by comparison with other inventory items in the particular trade or business and which are not properly includible as part of another pool.
(a) By reference to the actual cost of the goods most recently purchased or produced;
(b) By reference to the actual cost of the goods purchased or produced during the taxable year in the order of acquisition;
(c) By application of an average unit cost equal to the aggregate cost of all of the goods purchased or produced throughout the taxable year divided by the total number of units so purchased or produced; or
(d) Pursuant to any other proper method which, in the opinion of the Commissioner, clearly reflects income.
(a) A taxpayer elects, beginning with the calendar year 1961, to compute his inventories by use of the LIFO inventory method under section 472 and further elects to use the dollar-value method in pricing such inventories as provided in paragraph (a) of this section. He creates Pool No. 1 for items A, B, and C. The composition of the inventory for Pool No. 1 at the base date, January 1, 1961, is as follows:
| Items | Units | Unit cost | Total cost |
|---|---|---|---|
| A | 1,000 | $5 | $5,000 |
| B | 2,000 | 4 | 8,000 |
| C | 500 | 2 | 1,000 |
| Total base-year cost at Jan. 1, 1961 | 14,000 |
(b) The closing inventory of Pool No. 1 at December 31, 1961, contains 3,000 units of A, 1,000 units of B, and 500 units of C. The taxpayer computes the current-year cost of the items making up the pool by reference to the actual cost of goods most recently purchased. The most recent purchases of items A, B, and C are as follows:
| Item | Purchase date | Quantity purchased | Unit cost |
|---|---|---|---|
| A | Dec. 15, 1961 | 3,500 | $6.00 |
| B | Dec. 10, 1961 | 2,000 | 5.00 |
| C | Nov. 1, 1961 | 500 | 2.50 |
(c) The inventory of Pool No. 1 at December 31, 1961, shown at base-year and current-year cost is as follows:
| Item | Quantity | Dec. 31, 1961, inventory at Jan. 1, 1961, base-year cost | Dec. 31, 1961, inventory at current-year cost | ||
|---|---|---|---|---|---|
| Unit cost | Amount | Unit cost | Amount | ||
| A | 3,000 | $5.00 | $15,000 | $6.00 | $18,000 |
| B | 1,000 | 4.00 | 4,000 | 5.00 | 5,000 |
| C | 500 | 2.00 | 1,000 | 2.50 | 1,250 |
| Total | 20,000 | 24,250 | |||
(d) If the amount of the December 31, 1961, inventory at base-year cost were equal to, or less than, the base-year cost of $14,000 at January 1, 1961, such amount would be the closing LIFO inventory at December 31, 1961. However, since the base-year cost of the closing LIFO inventory at December 31, 1961, amounts to $20,000, and is in excess of the $14,000 base-year cost of the opening inventory for that year, there is a $6,000 increment in Pool No. 1 during the year. This increment must be valued at current-year cost, i.e., the ratio of 24,250/20,000, or 121.25 percent. The LIFO value of the inventory at December 31, 1961, is $21,275, computed as follows:
| Dec. 31, 1961, inventory at Jan. 1, 1961, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1961, inventory at LIFO value | |
|---|---|---|---|
| Jan. 1, 1961, base cost | 14,000 | 100.00 | $14,000 |
| Dec. 31, 1961, increment | 6,000 | 121.25 | 7,275 |
| Total | 20,000 | 21,275 |
(a) Assume the taxpayer in Example 1 during the year 1962 completely disposes of item C and purchases item D. Assume further that item D is properly includible in Pool No. 1 under the provisions of this section. The closing inventory on December 31, 1962, consists of quantities at current-year unit cost, as follows:
| Items | Units | Current-year unit cost Dec. 31, 1962 |
|---|---|---|
| A | 2,000 | $6.50 |
| B | 1,500 | 6.00 |
| D | 1,000 | 5.00 |
(b) The taxpayer establishes that the cost of item D, had he acquired it on January 1, 1961, would have been $2.00 per unit. Such cost shall be used as the base-year unit cost for item D, and the LIFO computations at December 31, 1962, are made as follows:
| Item | Quantity | Dec. 31, 1962, inventory at Jan. 1, 1961, base-year cost | Dec. 31, 1962, inventory at current-year cost | ||
|---|---|---|---|---|---|
| Unit cost | Amount | Unit cost | Amount | ||
| A | 2,000 | $5.00 | $10,000 | $6.50 | $13,000 |
| B | 1,500 | 4.00 | 6,000 | 6.00 | 9,000 |
| D | 1,000 | 2.00 | 2,000 | 5.00 | 5,000 |
| Total | 18,000 | 27,000 | |||
(c) Since the closing inventory at base-year cost, $18,000, is less than the 1962 opening inventory at base-year cost, $20,000, a liquidation of $2,000 has occurred during 1962. This liquidation is to be reflected by reducing the most recent layer of increment. The LIFO value of the inventory at December 31, 1962, is $18,850, and is summarized as follows:
| Dec. 31, 1962, inventory at Jan. 1, 1961, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1962, inventory at LIFO value | |
|---|---|---|---|
| Jan. 1, 1961, base cost | 14,000 | 100.00 | $14,000 |
| Dec. 31, 1961, increment | 4,000 | 121.25 | 4,850 |
| Total | 18,000 | 18,850 |
(2) BLS table selection. Manufacturers, processors, wholesalers, jobbers, and distributors must select BLS price indexes from Table 6 (Producer price indexes and percent changes for commodity groupings and individual items, not seasonally adjusted) of the “PPI Detailed Report”, unless the taxpayer can demonstrate that selecting BLS price indexes from another table of the “PPI Detailed Report” is more appropriate. Retailers may select BLS price indexes from either Table 3 (Consumer Price Index for all Urban Consumers (CPI-U): U.S. city average, detailed expenditure categories) of the “CPI Detailed Report” or from Table 6 (or another more appropriate table) of the “PPI Detailed Report.” The selection of a BLS table is a method of accounting and must be used for the taxable year of adoption and all subsequent years, unless the taxpayer obtains the Commissioner's consent under § 1.446-1(e) to change its table selection. A taxpayer that changes its BLS table must establish a new base year in the year of change as described in paragraph (e)(3)(iv)(B) of this section.
(3) Appropriate month. In the case of a retailer using the retail method, the appropriate month is the last month of the retailer's taxable year. In the case of all other taxpayers, the appropriate month is the month most consistent with the method used to determine the current-year cost of the dollar-value pool under paragraph (e)(2)(ii) of this section and the taxpayer's history of inventory production or purchases during the taxable year. A taxpayer not using the retail method may annually select an appropriate month for each dollar-value pool or make an election on Form 970, “Application to Use LIFO Inventory Method,” to use a representative appropriate month (representative month). An election to use a representative month is a method of accounting and the month elected must be used for the taxable year of the election and all subsequent taxable years, unless the taxpayer obtains the Commissioner's consent under § 1.446-1(e) to change or revoke its election.
A wholesaler of seasonal goods timely files a Form 970, “Application to Use LIFO Inventory Method,” for the taxable year ending December 31, 2001. The taxpayer indicates elections to use the dollar-value LIFO method, to determine the current-year cost using the earliest acquisitions method in accordance with paragraph (e)(2)(ii)(b) of this section, and to use the IPIC method under paragraph (e)(3) of this section. Although the taxpayer purchases inventory items regularly throughout the year, the items purchased vary according to the seasons. The seasonal items on hand at December 31, 2001, are purchased between October and December. Thus, based on the taxpayer's use of the earliest acquisitions method of determining current-year cost and its experience with inventory purchases, the appropriate month for the items represented in the ending inventory at December 31, 2001, is October.
A retailer not using the retail method timely files a Form 970, “Application to Use LIFO Inventory Method,” for the taxable year ending December 31, 2001. The taxpayer indicates elections to use the dollar-value LIFO method, the most recent purchases method of determining current-year cost under paragraph (e)(2)(ii)(a) of this section, the IPIC method under paragraph (e)(3) of this section, and December as its representative month under paragraph (e)(3)(iii)(B)(3) of this section. The items in the taxpayer's ending inventory are purchased fairly uniformly throughout the year, with the first purchases normally occurring in January and the last purchases normally occurring in December. The taxpayer's election to use December as its representative month is permissible because the taxpayer elected to use the most recent purchases method and the taxpayer's last purchases of the taxable year normally occur during December, the last month of the taxpayer's taxable year.
The facts are the same as in Example 2, except the taxpayer files a Form 3115, “Application for Change in Accounting Method,” requesting permission to change to the earliest acquisitions method of determining current-year cost in accordance with paragraph (e)(2)(ii)(b) of this section and to change its representative month from December to January beginning with the taxable year ending December 31, 2003. If the Commissioner consents to the taxpayer's request to change to the earliest acquisitions method, December will no longer be a permissible representative month for this taxpayer because of the absence of a nexus between the earliest acquisitions method, the month of December (the last month of the taxpayer's taxable year), and the taxpayer's experience with inventory purchases during the year. Thus, the Commissioner will permit the taxpayer to change its representative month to January, the first month of the taxpayer's taxable year.
The facts are the same as in Example 2. In 2002, the taxpayer changes its annual accounting period to a taxable year ending June 30, which requires the taxpayer to file a return for the short taxable year beginning January 1, 2002, and ending June 30, 2002. As a result, December is no longer a permissible representative month because of the absence of a nexus between the most recent purchases method, the month of December, and the taxpayer's experience with inventory purchases during the year. The taxpayer should file a Form 3115 requesting permission to change its representative month from December to June beginning with the short taxable year ending June 30, 2002. Because the taxpayer's last purchases of the taxable year now will occur in June, the Commissioner will consent to the taxpayer's request to change its representative month to June.
The facts are the same as in Example 2, except that the taxpayer elects to use January as its representative month. The taxpayer timely files a Form 3115 requesting permission to change its representative month from January to December beginning with the taxable year ending December 31, 2003. January is not a permissible representative month because of the absence of a nexus between the most recent purchases method, the taxpayer's history of inventory purchases, and the month of January, the first month in the taxpayer's taxable year. Because December is a permissible representative month, the Commissioner will permit the taxpayer to change its representative month to December.
(iii) New base year. A taxpayer may establish a new base year in the year following the taxable year for which the taxpayer computed a compound category inflation index under this paragraph (e)(3)(iii)(D)(4) for one or more affected BLS categories in a dollar-value pool. See paragraph (e)(3)(iv)(B) of this section for the procedures and computations incident to establishing a new base year.
(iv) Examples. The following examples illustrate the rules of this paragraph (e)(3)(iii)(D)(4):
(i) A retailer, whose taxable year ends January 31, elected to account for its inventories using the dollar-value LIFO method and double-extension IPIC method (based on the CPI), beginning with the taxable year ending January 31, 1997. The taxpayer does not use the retail method, but elected to use January as its representative month. On January 31, 1999, the taxpayer's only dollar-value pool contains only two items—lemons and peaches. The total current-year cost of these items is as follows: lemons, $40, and peaches, $30.
(ii) The CPI was revised in October of 1998 to eliminate the “Citrus fruits” subcategory of “Other fresh fruits.” In addition, the base-year BLS price index for “Other fresh fruits” was reset to 100.00 as of October 1, 1998. In relevant part, the January 1999 CPI permits the assignment of both lemons and peaches to “Other fresh fruits.” The January 1999 BLS price indexes for “Citrus fruits” and “Other fresh fruits” are 96.6 and 105.6, respectively. In relevant part, the September 1998 CPI permits the assignment of lemons to “Citrus fruits” and peaches to “Other fresh fruits.” The September 1998 BLS price indexes for “Citrus fruits” and “Other fresh fruits” are 194.9 and 294.9, respectively, and the January 1997 BLS price indexes for “Citrus fruits” and “Other fresh fruits” are 190.2 and 290.2, respectively.
(iii) Because the BLS eliminated the category, “Citrus fruits,” as of October 1998, it did not publish a BLS price index for that category in the January 1999 CPI. Thus, the taxpayer cannot compute a category inflation index for “Citrus fruits” under the normal procedures, but may compute a compound category inflation index for that affected BLS category using the procedures described in paragraph (e)(3)(iii)(D)(4)(ii) of this section.
(iv) The taxpayer computes a compound category inflation index for the two BLS categories that formerly included lemons and peaches. The taxpayer first assigns lemons and peaches to “Other fresh fruits,” the most-detailed index in the January 1999 CPI, and then computes the category inflation index for the second portion as follows:
| Item | 1999 category | Jan. 1999 index/Sept. 1998 index (as published in Oct. 1998) | Category inflation index |
|---|---|---|---|
| Lemons and Peaches | Other fresh fruits | 105.6/100.0 | 1.0560 |
(v) The taxpayer assigns the lemons and peaches to the most-detailed BLS categories in the January 1998 CPI as follows: lemons to “Citrus fruits” and peaches to “Other fresh fruits.” Then, the taxpayer computes the category inflation index for the first portion as follows:
| Item | 1998 category | Sept. 1998 index (as published in Sept. 1998)/Jan. 1997 | Category inflation index |
|---|---|---|---|
| Lemons | Citrus fruits | 194.9/190.2 | 1.0247 |
| Peaches | Other fresh Fruits | 294.9/290.2 | 1.0162 |
(vi) Because lemons and peaches, which are included together in the revised “Other fresh fruits” category, had been included in separate BLS categories before the BLS table was revised, the taxpayer must compute a single corresponding category inflation index for the affected BLS categories for the first portion. This corresponding category inflation index is the weighted harmonic mean of the separate corresponding category inflation indexes for the first portion using the cost of the items in ending inventory as the weights. The taxpayer computes the corresponding category inflation index for “Other fresh fruits” for the first portion as follows:
| Item | (I) Weight (cost of item) | (II) Category inflation index | (III) Quotient: (I)/(II) |
|---|---|---|---|
| Lemons | $40.00 | 1.0247 | $39.04 |
| Peaches | 30.00 | 1.0162 | 29.52 |
| Total | 70.00 | 68.56 |
| (IV) Sum of weights | (V) Sum of (weight/category inflation index) | (VI) Weighted harmonic mean of other fresh fruits: (IV)/(V) |
|---|---|---|
| $70.00 | $68.56 | 1.0210 |
(vii) Finally, the taxpayer computes the compound category inflation index for Other fresh fruits as follows:
| Item | (I) Category inflation index (second portion) | (II) Category inflation index (first portion) | (III) Compound category inflation index: (I)*(II) |
|---|---|---|---|
| Other fresh fruits | 1.0560 | 1.0210 | 1.0782 |
(viii) The taxpayer may establish a new base year for the taxable year ending January 31, 2000.
(i) The facts are the same as in Example 1, except prior to October 1998, both lemons and peaches were assigned to “Other fresh fruits” and in the October 1998 CPI, the BLS created a new category, “Citrus fruits,” for citrus fruits, such as lemons. Moreover, the BLS reset the base-year BLS price index for “Other fresh fruits” to 100.0 as of October 1, 1998. As a result of these changes, the taxpayer may no longer assign lemons to “Other fresh fruits.”
(ii) Because “Citrus fruits” is new as of October 1998, the BLS did not publish a BLS price index for this BLS category in the January 1999 CPI. Thus, because the taxpayer cannot compute a category inflation index for “Citrus fruits” under the normal procedures, the taxpayer may compute a compound category inflation index for the affected BLS category using the procedures described in paragraph (e)(3)(iii)(D)(4)(ii) of this section.
(iii) Based on the January 1999 CPI, the taxpayer assigns lemons to “Citrus fruits” and peaches to “Other fresh fruits.” Then, the taxpayer computes a compound category inflation index for each of the two BLS categories. The computation of the category inflation index for the second portion is as follows:
| Item | 1999 category | Jan. 1999 index/Sept. 1998 index (as published in Oct. 1998) | Category inflation index |
|---|---|---|---|
| Lemons | Citrus fruits | 96.6/100 | 0.9660 |
| Peaches | Other fresh fruits | 105.6/100 | 1.0560 |
(iv) Then, the taxpayer computes the category inflation index for the first portion as follows:
| Item | 1998 category | Sept. 1998 index (as published in Sept. 1998)/Jan. 1997 | Category inflation index |
|---|---|---|---|
| Lemons & Peaches | Other fresh fruits | 294.9/290.2 | 1.0162 |
(v) Finally, the taxpayer computes the compound category inflation index for “Citrus fruits” and “Other fresh fruits”:
| Item | (I) Category inflation index (second portion) | (II) Category inflation index (first portion) | (III) Compound category inflation index: (I)*(II) |
|---|---|---|---|
| Citrus fruits | 0.9660 | 1.0162 | 0.9816 |
| Other fresh fruits | 1.0560 | 1.0162 | 1.0731 |
(vi) The taxpayer may establish a new base year for the taxable year ending January 31, 2000.
(A) subsumes two or more BLS categories;
(B) Does not have a single assigned item whose current-year cost is 10 percent or more of the current-year cost of all the items in the dollar-value pool;
(C) Has at least one item in at least one of the subsumed BLS categories; and
(D) Has at least one subsumed BLS category that either does not have any assigned items or is a separate 10 percent BLS category.
(ii) Determination of category inflation index. If the rules of this paragraph (e)(3)(iii)(D)(5) apply, the category inflation index for the less-detailed 10 percent BLS category is equal to the weighted arithmetic mean of the category inflation index (or, compound category inflation index, if applicable) for each of the subsumed BLS categories that have been assigned at least one item from the taxpayer's dollar-value pool (excluding any item that is properly assigned to a separate 10 percent BLS category). [Weighted Arithmetic Mean = Sum of (Weight × Category Inflation Index)]/Sum of Weights]. The appropriate weight for each of the most-detailed BLS categories referenced in the preceding sentence is the corresponding BLS weight. Currently, in January of each year, the BLS publishes the BLS weights determined for December of the preceding year. In the case of a taxpayer using the double-extension IPIC method, the BLS weights for December of the taxable year preceding the base year are to be used for all taxable years. In the case of a taxpayer using the link-chain IPIC method, the BLS weights for December of a given calendar year are to be used for taxable years that end during the 12-month period that begins on July 1 of the following calendar year. However, if the BLS weights are not published for all of the most-detailed BLS categories referenced above, the taxpayer may use the current-year cost (or in the case of a retailer using the retail method, the retail selling prices) of all items assigned to a specific most-detailed BLS category as the appropriate weight for that category, but must compute a weighted harmonic mean. See paragraph (e)(3)(iii)(E)(1) of this section for a formula of the weighted harmonic mean.
(2) Link-chain IPIC method. Under the link-chain IPIC method, the IPI for a dollar-value pool is the product of the weighted harmonic mean of the category inflation indexes (or, if applicable, the compound category inflation indexes) determined under paragraph (e)(3)(iii)(D) of this section for each selected BLS category (or, if applicable, 10 percent BLS category) represented in the taxpayer's dollar-value pool at the end of the taxable year multiplied by the IPI for the immediately preceding taxable year. The formula for computing the weighted harmonic mean of the category inflation indexes is: [Sum of Weights/Sum of (Weight/Category Inflation Index)]. The weights to be used when computing this weighted harmonic mean are the current-year costs (or, in the case of a retailer using the retail method, the retail selling prices) in each selected BLS category represented in the dollar-value pool at the end of the taxable year.
(3) Examples. The following examples illustrate the rules of this paragraph (e)(3)(iii)(E):
(i) Introduction. R is a retail furniture merchant that does not use the retail method. For the taxable year ending December 31, 2000, R used the first-in, first-out method of identifying inventory and valued its inventory at cost. The total cost of R's inventory on December 31, 2000, was $850,000. R elected to use the dollar-value LIFO and double-extension IPIC methods for its taxable year ending December 31, 2001. R does not elect to use the 10 percent method described in paragraph (e)(3)(iii)(C)(2) of this section. R determines the current-year cost of the items using the actual cost of the most recently purchased goods. R elected to pool its inventory based on the major groups in Table 6 of the monthly “PPI Detailed Report” in accordance with the special IPIC pooling rules of paragraph (b)(4) of this section. All items in R's inventory fall within the 2-digit commodity code in Table 6 of the monthly “PPI Detailed Report” for “furniture and household durables.” Therefore, R will maintain a single dollar-value pool.
(ii) Select a BLS table and appropriate month for 2001. R determines that the appropriate month for 2001 is October. R also determines that the appropriate month for 2000 would have been December if R had used the IPIC method for that year.
(iii) Assign inventory items to BLS categories for 2001. For 2001, R assigns all items in the dollar-value pool to the most-detailed BLS categories listed in Table 6 of the October 2001 “PPI Detailed Report” that contain those items. The BLS categories and the current-year cost of the items assigned to them are summarized as follows:
| Commodity code | Category | Current-year cost |
|---|---|---|
| 12120101 | Living Room Table | $111,924.00 |
| 12120211 | Dining Room Table | 159,578.00 |
| 12120216 | Dining Room Chairs | 98,639.00 |
| 12130101 | Upholstered Sofas | 332,488.00 |
| 12130111 | Upholstered Chairs | 218,751.00 |
| Total | 921,380.00 |
(iv) Compute category inflation indexes for 2001. Because R elected to use the double-extension IPIC method and did not elect the 10 percent method, the category inflation indexes are computed in accordance with paragraph (e)(3)(iii)(D)(3)(ii) of this section (BLS price indexes for October 2001 divided by BLS price indexes for December 2000). R computes the category inflation indexes for 2001 as follows:
| Category | (I) Oct. 2001 index | (II) Dec. 2000 index | (III) Category inflation index: (I)/(II) |
|---|---|---|---|
| Living Room Table | 172.4 | 169.2 | 1.018913 |
| Dining Room Table | 171.9 | 168.1 | 1.022606 |
| Dining Room Chairs | 172.8 | 169.7 | 1.018268 |
| Upholstered Sofas | 142.2 | 140.9 | 1.009226 |
| Upholstered Chairs | 134.1 | 132.5 | 1.012075 |
(v) Compute IPI for 2001. R must compute the IPI for 2001, which is the weighted harmonic mean of the category inflation indexes for 2001. The formula for the weighted harmonic mean provided in paragraph (e)(3)(iii)(E)(1) of this section is [Sum of Weights/Sum of (Weight/Category Inflation Index)]. The IPI for 2001 is computed as follows:
| Category | (I) Weight | (II) Category inflation index | (III) Quotient: (I)/(II) |
|---|---|---|---|
| Living Room Table | $111,924.00 | 1.018913 | $109,846.47 |
| Dining Room Table | 159,578.00 | 1.022606 | 156,050.33 |
| Dining Room Chairs | 98,639.00 | 1.018268 | 96,869.39 |
| Upholstered Sofas | 332,488.00 | 1.009226 | 329,448.51 |
| Upholstered Chairs | 218,751.00 | 1.012075 | 216,141.10 |
| Total | $921,380.00 | $908,355.80 |
| (IV) Sum of weights | (V) Sum of (weight/category inflation index) | (VI) Inventory price index: (IV)/(V) |
|---|---|---|
| $921,380.00 | $908,355.80 | 1.01433821 |
(vi) Determine the LIFO value of the dollar-value pool for 2001. For 2001, R determines the total base-year cost of its ending inventory by dividing the total current-year cost of the items in the dollar-value pool by the IPI for 2001. The total base-year cost of R's ending inventory is $908,355.80 ($921,380/1.01433821). Comparing the base-year cost of the ending inventory to the base-year cost of the beginning inventory, R determines that the base-year cost of the 2001 increment is $58,355.80 ($908,355.80 - $850,000.00). R multiplies the base-year cost of the 2001 increment by the IPI for 2001 and determines that the LIFO value of the 2001 layer is $59,192.52 ($58,355.80 * 1.01433821). Thus, the LIFO value of R's total inventory at the end of 2001 is $909,192.52 ($850,000.00 (opening inventory) + $59,192.52 (2001 layer)).
(vii) Select a BLS table and appropriate month for 2002. For 2002, R must compute a new IPI under the double-extension IPIC method to determine the LIFO value of its dollar-value pool. R determines that the appropriate month for 2002 is November.
(viii) Assign inventory items to BLS categories for 2002. For 2002, R assigns all items in the dollar-value pool to the most-detailed BLS categories listed in Table 6 of the November 2002 “PPI Detailed Report” that contain those items. The BLS categories and the current-year cost of the items assigned to them are summarized as follows:
| Commodity code | Category | Current-year cost |
|---|---|---|
| 12120103 | Living Room Desks | $125,008.00 |
| 12120211 | Dining Room Table | 136,216.00 |
| 12120216 | Dining Room Chairs | 113,569.00 |
| 12130101 | Upholstered Sofas | 343,900.00 |
| 12130111 | Upholstered Chairs | 233,050.00 |
| Total | $951,743.00 |
(ix) Compute category inflation indexes for 2002. Because R uses the double-extension IPIC method and did not elect the 10 percent method, the category inflation indexes are computed in accordance with paragraph (e)(3)(iii)(D)(3)(ii) of this section (BLS price indexes for November 2002 divided by BLS price indexes for December 2000). R computes the category inflation indexes for 2002 as follows:
| Category | (I) Nov. 2002 index | (II) Dec. 2000 index | (III) Category inflation index (I)/(II) |
|---|---|---|---|
| Living Room Desks | 172.6 | 160.3 | 1.076731 |
| Dining Room Table | 174.8 | 168.1 | 1.039857 |
| Dining Room Chairs | 177.0 | 169.7 | 1.043017 |
| Upholstered Sofas | 144.9 | 140.9 | 1.028389 |
| Upholstered Chairs | 136.6 | 132.5 | 1.030943 |
(x) Compute IPI for 2002. R must compute the IPI for 2002, which is the weighted harmonic mean [Sum of Weights/Sum of (Weight/Category Inflation Index)] of the category inflation indexes for 2002. The IPI for 2002 is computed as follows:
| Category | (I) Weight | (II) Category inflation index | (III) Quotient: (I)/(II) |
|---|---|---|---|
| Living Room Desks | $125,008.00 | 1.076731 | $116,099.56 |
| Dining Room Table | 136,216.00 | 1.039857 | 130,994.93 |
| Dining Room Chairs | 113,569.00 | 1.043017 | 108,885.09 |
| Upholstered Sofas | 343,900.00 | 1.028389 | 334,406.53 |
| Upholstered Chairs | 233,050.00 | 1.030943 | 226,055.17 |
| Total | 951,743.00 | 916,441.28 |
| (IV) Sum of weights | (V) Category inflation index | (VI) Inventory price index: (IV)/(V) |
|---|---|---|
| $951,743.00 | $916,441.28 | 1.03852044 |
(xi) Determine the LIFO value of the pool for 2002. For 2002, R determines the total base-year cost of its ending inventory by dividing the total current-year cost of the items in the dollar-value pool by the IPI for 2002. The total base-year cost of the ending inventory is $916,441.28 ($951,743.00/1.03852044). Comparing the base-year cost of the ending inventory to the base-year cost of the beginning inventory, R determines that the base-year cost of the 2002 increment is $8,085.48 ($916,441.28−$908,355.80). R multiplies the base-year cost of the 2002 increment by the IPI for 2002 and determines that the LIFO value of the 2002 layer is $8,396.94 ($8,085.48 * 1.03852044). Thus, the LIFO value of R's total inventory at the end of 2002 is $917,589.46 ($850,000.00 (opening inventory) + $59,192.52 (2001 layer) + $8,396.94 (2002 layer)).
(i) Introduction. The facts are the same as Example 1, except that R uses the link-chain IPIC method. The double-extension IPIC method and the link-chain IPIC method yield the same results for the first taxable year in which the dollar-value LIFO and IPIC methods are used. Therefore, this example illustrates only how R will compute the IPI for, and determine the LIFO value of, its dollar-value pool for 2002.
(ii) Select a BLS table and appropriate month for 2002. R determines that the appropriate month for 2002 is November.
(iii) Assign inventory items to BLS categories for 2002. For 2002, R assigns all items in the dollar-value pool to the most-detailed BLS categories listed in Table 6 of the November 2002 “PPI Detailed Report” that contain those items. The BLS categories and the current-year cost of the items assigned to them are summarized as follows:
| Commodity code | Category | Current-year cost |
|---|---|---|
| 12120103 | Living Room Desks | $125,008.00 |
| 12120211 | Dining Room Table | 136,216.00 |
| 12120216 | Dining Room Chairs | 113,569.00 |
| 12130101 | Upholstered Sofas | 343,900.00 |
| 12130111 | Upholstered Chairs | 233,050.00 |
| Total | 951,743.00 |
(iv) Compute category inflation indexes for 2002. Because R uses the link-chain IPIC method and did not elect the 10 percent method, the category inflation indexes are computed in accordance with paragraph (e)(3)(iii)(D)(3)(iii) of this section (BLS price indexes for November 2002 divided by BLS price indexes for October 2001). R computes the category inflation indexes for 2002 as follows:
| Category | (I) Nov. 2002 index | (II) Oct. 2001 index | (III) Category inflation index: (I)/(II) |
|---|---|---|---|
| Living Room Desks | 172.6 | 162.0 | 1.065432 |
| Dining Room Table | 174.8 | 171.9 | 1.016870 |
| Dining Room Chairs | 177.0 | 172.8 | 1.024306 |
| Upholstered Sofas | 144.9 | 142.2 | 1.018987 |
| Upholstered Chairs | 136.6 | 134.1 | 1.018643 |
(v) Compute IPI for 2002. As provided in paragraph (e)(3)(iii)(E)(2) of this section, R must compute the IPI for 2002 by multiplying the weighted harmonic mean of the category inflation indexes for 2002 by the IPI for 2001. The IPI for 2002 is computed as follows:
| Category | (I) Weight | (II) Category inflation index | (III) Quotient: (I)/(II) |
|---|---|---|---|
| Living Room Desks | $125,008.00 | 1.065432 | $117,330.81 |
| Dining Room Table | 136,216.00 | 1.016870 | 133,956.16 |
| Dining Room Chairs | 113,569.00 | 1.024306 | 110,874.09 |
| Upholstered Sofas | 343,900.00 | 1.018987 | 337,492.04 |
| Upholstered Chairs | 233,050.00 | 1.018643 | 228,784.77 |
| Total | 951,743.00 | 928,437.87 |
| (IV) Sum of weights | (V) Sum of (weight/category inflation index) | (VI) Weighted harmonic mean of category inflation indexes for 2002: (IV)/(V) | (VII) Inventory price index for 2001 | (VIII) Inventory price index for 2002: (VI)*(VII) |
|---|---|---|---|---|
| $951,743.00 | $928,437.87 | 1.02510144 | 1.01433821 | 1.03979956 |
(vi) Determine the LIFO value of the pool for 2002. R determines the total base-year cost of its ending inventory by dividing the total current-year cost of the items in the dollar-value pool by the IPI for 2002. The total base-year cost of the ending inventory is $915,313.91 ($951,743.00 / 1.03979956). Comparing the base-year cost of the ending inventory to the base-year cost of the beginning inventory, R determines that the base-year cost of the 2002 layer is $6,958.11 ($915,313.91-$908,355.80). R multiplies the base-year cost of the 2002 layer by the IPI for 2002 and determines that the LIFO value of the 2002 layer is $7,235.04 ($6,958.11 * 1.03979956). Thus, the LIFO value of R's total inventory at the end of 2002 is $916,427.56 ($850,000.00 (opening inventory) + $59,192.52 (2001 layer) + $7,235.04 (2002 layer)).
(i) In 1990, X elected to use a dollar-value LIFO method (other than the IPIC method) for its single dollar-value pool. X is granted permission to change to the link-chain IPIC method, beginning with the taxable year ending December 31, 2001. X will continue using a single dollar-value pool. X's beginning inventory as of January 1, 2001, computed using its former inventory method, is as follows:
| Layer | (I) Base-year cost | (II) Inflation index | (III) LIFO value: (I) * (II) |
|---|---|---|---|
| Base layer | $135,000 | 1.00 | $135,000 |
| 1991 layer | 20,000 | 1.43 | 28,600 |
| 1994 layer | 60,000 | 1.55 | 93,000 |
| 1995 layer | 13,000 | 1.59 | 20,670 |
| 1997 layer | 2,000 | 1.61 | 3,220 |
| Total | 230,000 | 280,490 |
(ii) Under X's method of determining the current-year cost of items in a dollar-value pool, the current-year cost of the beginning inventory is $391,000. Thus, X's new base-year cost as of January 1, 2001, is $391,000. X allocates this new base-year cost to each layer based on the ratio of old base-year cost of the layer to the total old base-year cost of the dollar-value pool. To recompute the inflation indexes for each of its layers, X divides the LIFO value of each layer by the new base-year cost attributable to the layer. The new base-year cost, recomputed inflation indexes, and LIFO value of X's layers as of January 1, 2001, are as follows:
| Layer | (I) Base-year cost | (II) Inflation index | (III) LIFO value: (I) * (II) |
|---|---|---|---|
| Base layer | $229,500 | 0.588235 | $135,000 |
| 1991 layer | 34,000 | 0.841176 | 28,600 |
| 1994 layer | 102,000 | 0.911765 | 93,000 |
| 1995 layer | 22,100 | 0.935294 | 20,670 |
| 1997 layer | 3,400 | 0.947059 | 3,220 |
| Total | 391,000 | 280,490 |
(iii) In 2001, the current-year cost of X's ending inventory is $430,139. The weighted harmonic mean of the category inflation indexes applicable to X's ending inventory is 1.075347, and in accordance with paragraph (e)(3)(iv)(B)(1)(i) of this section, the inflation index for the immediately preceding taxable year is 1.00. Thus, X's IPI for 2001 is 1.075347 (1.00 * 1.075347). The total base-year cost of X's ending inventory is $400,000 ($430,139/1.075347). The base-year cost, IPI, and LIFO value of X's layers as of December 31, 2001, are as follows:
| Layer | (I) Base-year cost | (II) Inventory price index | (III) LIFO value: (I) * (II) |
|---|---|---|---|
| Base layer | $229,500 | 0.588235 | $135,000 |
| 1991 layer | 34,000 | 0.841176 | 28,600 |
| 1994 layer | 102,000 | 0.911765 | 93,000 |
| 1995 layer | 22,100 | 0.935294 | 20,670 |
| 1997 layer | 3,400 | 0.947059 | 3,220 |
| 2001 layer | 9,000 | 1.075347 | 9,678 |
| Total | 400,000 | 290,168 |
(iv) In 2002, the current-year cost of X's ending inventory is $418,000. The weighted harmonic mean of the category inflation indexes applicable to X's ending inventory is 1.02292562, and the IPI for the immediately preceding year is 1.075347. Thus, X's IPI for 2001 is 1.10 (1.075347 * 1.02292562). The total base-year cost of X's ending inventory is $380,000 ($418,000/1.10), which results in a liquidation of $20,000 ($400,000−$380,000) in terms of base-year cost. This liquidation eliminates the 2001 layer ($9,000 base-year cost), the 1997 layer ($3,400 base-year cost), and part of the 1995 layer ($7,600 base-year cost). The base-year cost, indexes, and LIFO value of X's layers as of December 31, 2002, are as follows:
| Layer | (I) Base-year cost | (II) Inventory price index | (III) LIFO value: (I) * (II) |
|---|---|---|---|
| Base layer | $229,500 | 0.588235 | $135,000 |
| 1991 layer | 34,000 | 0.841176 | 28,600 |
| 1994 layer | 102,000 | 0.911765 | 93,000 |
| 1995 layer | 14,500 | 0.935294 | 13,562 |
| Total | 380,000 | 270,162 |
(i) Z began using a dollar-value LIFO method other than the IPIC method in the taxable year ending December 31, 1998, and maintains a single dollar-value pool. Z's beginning inventory as of January 1, 2000, computed using its method of accounting, was as follows:
| Layer | (I) Base-year cost | (II) Inflation index | (III) LIFO value: (I)*(II) |
|---|---|---|---|
| Base layer | $105,000 | 1.00 | $105,000 |
| 1998 layer | 3,000 | 1.40 | 4,200 |
| Total | 108,000 | 109,200 |
(ii) Upon examining Z's federal income tax return for the taxable year ending December 31, 2000, the examining agent determines that Z's dollar-value LIFO method does not clearly reflect income. The examining agent chooses to change Z to the double-extension IPIC method for 2000 and implements the change using the simplified transition method as follows. First, the inventory in Z's dollar-value pool at the end of 2000 is assigned to the most-detailed categories in the CPI or PPI, whichever is appropriate. Assume that 80 percent of the current-year cost of Z's inventory as of December 31, 2000, is assigned to Category 1, 10 percent is assigned to Category 2, and 10 percent is assigned to Category 3. Assume further that the current-year cost of the inventory in Z's dollar-value pool at the end of 1998 and 1999 was $133,000 and $145,000, respectively.
(iii) The category inflation indexes for 1998 computed under the double-extension IPIC method are 1.17 for Category 1, 1.26 for Category 2, and 1.19 for Category 3. The weights to be used in computing the IPI for 1998 are $106,400 ($133,000 * 80 percent) for Category 1, $13,300 ($133,000 * 10 percent) for Category 2, and $13,300 ($133,000 * 10 percent) for Category 3. The IPI for 1998 is computed as follows:
| Category | (I) Weight | (II) Category inflation index | (III) Quotient: (I)/(II) |
|---|---|---|---|
| 1 | $106,400 | 1.17 | 90,940 |
| 2 | 13,300 | 1.26 | 10,556 |
| 3 | 13,300 | 1.19 | 11,176 |
| Total | 133,000 | 112,672 |
| (IV) Sum of weights | (V) Sum of (weight/category inflation index) | (VI) Inventory price index: (IV)/(V) |
|---|---|---|
| $133,000 | $112,672 | 1.180417 |
(iv) The base-year cost of the inventory in Z's pool at the end of 1998 is $112,672 ($133,000/1.180417), and the base-year cost of the 1998 increment is $7,672 ($112,672−$105,000). The LIFO value of the 1998 layer is $9,056 ($7,672 × 1.180417).
(v) The category inflation indexes for 1999 computed under the double-extension IPIC method were 1.21 for Category 1, 1.29 for Category 2 and 1.23 for Category 3. The weights to be used in computing the IPI for 1999 are $116,000 ($145,000 × 80 percent) for Category 1, $14,500 ($145,000 × 10 percent) for Category 2, and $14,500 ($145,000 × 10 percent) for Category 3. The IPI for 1999 is computed as follows:
| Category | (I) Weight | (II) Category inflation index | (III) Quotient: (I)/(II) |
|---|---|---|---|
| 1 | $116,000 | 1.21 | $95,868 |
| 2 | 14,500 | 1.29 | 11,240 |
| 3 | 14,500 | 1.23 | 11,789 |
| Total | 145,000 | 118,897 |
| (IV) Sum of weights | (V) Sum of (weight/category inflation index) | (VI) Inventory price index: (IV)/(V) |
|---|---|---|
| $145,000 | $118,897 | 1.219543 |
(vi) The base-year cost of the inventory in Z's pool at the end of 1999 is $118,897 ($145,000/1.219543), and the base-year cost of the 1999 layer is $6,225 ($118,897−$112,672). The LIFO value of the 1999 layer is $7,592 ($6,225 × 1.219543).
(vii) The LIFO value of Z's dollar-value pool at the end of 1999 computed under the double-extension IPIC method is as follows:
| Layer | (I) Base-year cost | (II) Inventory price index | (III) LIFO value: (I)*(II) |
|---|---|---|---|
| Base layer | $105,000 | 1.000000 | $105,000 |
| 1998 layer | 7,672 | 1.180417 | 9,056 |
| 1999 layer | 6,225 | 1.219542 | 7,592 |
| Total | 118,897 | 121,648 |
(viii) The section 481(a) adjustment is equal to the difference between the LIFO value of the inventory at the beginning of 2000 computed under Z's former method of accounting and recomputed by the examining agent under the double-extension IPIC method, or $12,448 ($121,648—$109,200).
(ix) Finally, the examining agent will recompute Z's taxable income for 2000 and succeeding taxable years using the double-extension IPIC method.
(i) Assume that the taxpayer has used another LIFO method for finished goods since 1954 and has complied with all the requirements prerequisite for a change to the dollar-value method. Items A, B, and C, which have previously been inventoried under the specific goods LIFO method, may properly be included in a single dollar-value LIFO pool. The LIFO inventory value of items A, B, and C at December 31, 1960, is $12,200, computed as follows:
| Year | Base quantity and yearly increments | Unit cost | Dec. 31, 1960, inventory at LIFO value |
|---|---|---|---|
| Item A | |||
| 1954 (base year) | 100 | $1 | $100 |
| 1955 | 200 | 2 | 400 |
| 1956 | 100 | 4 | 400 |
| 1960 | 100 | 6 | 600 |
| Total | 500 | 1,500 | |
| Item B | |||
| 1954 (base year) | 300 | 6 | 1,800 |
| 1955 | 100 | 8 | 800 |
| 1960 | 50 | 10 | 500 |
| Total | 450 | 3,100 | |
| Item C | |||
| 1954 (base year) | 1,000 | 4 | 4,000 |
| 1955 | 200 | 6 | 1,200 |
| 1956 | 300 | 8 | 2,400 |
| Total | 1,500 | 7,600 | |
| LIFO value of items A, B, and C at Dec. 31, 1960 | 12,200 |
There were no increments in the years 1957, 1958, or 1959.
(ii) The computation of the ratio of the total current-year cost to the total base-year cost for the base year and each layer of increment in Pool No. 1 is shown as follows:
| Item | 1954 base-year unit cost | Year 1954 | Increments | ||
|---|---|---|---|---|---|
| 1955 | 1956 | 1960 | |||
| A | |||||
| Base-year cost | $1.00 | $100 | $200 | $100 | $100 |
| LIFO value | 100 | 400 | 400 | 600 | |
| B | |||||
| Base-year cost | 6.00 | 1,800 | 600 | 300 | |
| LIFO value | 1,800 | 800 | 500 | ||
| C | |||||
| Base-year cost | 4.00 | 4,000 | 800 | 1,200 | |
| LIFO value | 4,000 | 1,200 | 2,400 | ||
| Total—Base-year cost | 5,900 | 1,600 | 1,300 | 400 | |
| Total—LIFO value | 5,900 | 2,400 | 2,800 | 1,100 | |
| Ratio of total current-year cost to total base-year cost (percent) | 100.00 | 150.00 | 215.38 | 275.00 | |
(iii) On the basis of the foregoing computations, the LIFO inventory of Pool No. 1, at December 31, 1960, is restated as follows:
| Dec. 31, 1960, inventory at base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
|---|---|---|---|
| 1954 base cost | $5,900 | 100.00 | $5,900 |
| 1955 increment | 1,600 | 150.00 | 2,400 |
| 1956 increment | 1,300 | 215.38 | 2,800 |
| 1960 increment | 400 | 275.00 | 1,100 |
| Total | 9,200 | 12,200 |
Assume the same facts as in Example 1 and assume further that the base-year cost of Pool No. 1 at December 31, 1961, is $8,350. Since the closing inventory for the taxable year 1961 at base-year cost is less than the opening inventory for that year at base-year cost, a liquidation has occurred during 1961. This liquidation absorbs all of the 1960 layer of increment and part of the 1956 layer of increment. The December 31, 1961, inventory is $10,131, computed as follows:
| Dec. 31, 1961, inventory at base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1961, inventory at LIFO value | |
|---|---|---|---|
| 1954 base cost | $5,900 | 100.00 | $5,900 |
| 1955 increment | 1,600 | 150.00 | 2,400 |
| 1956 increment | 850 | 215.38 | 1,831 |
| Total | 8,350 | 10,131 |
(a) Assume that items A, B, C, and D are all grouped together in one pool prior to December 31, 1960. The LIFO inventory value at December 31, 1960, is computed as follows:
| Pool ABCD | |||
|---|---|---|---|
| Dec. 31, 1960, inventory at Jan. 1, 1956, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
| Jan. 1, 1956, base cost | $10,000 | 100 | $10,000 |
| Dec. 31, 1956, increment | 1,000 | 110 | 1,100 |
| Dec. 31, 1958, increment | 5,000 | 120 | 6,000 |
| Dec. 31, 1960, increment | 4,000 | 125 | 5,000 |
| Total | 20,000 | 22,100 | |
(b) The extension of the quantity of items A, B, C, and D at respective base-year unit costs is as follows:
| Item | Quantity | Base-year unit cost | Amount |
|---|---|---|---|
| A | 2,000 | $2 | $4,000 |
| B | 1,000 | 3 | 3,000 |
| C | 1,000 | 5 | 5,000 |
| D | 4,000 | 2 | 8,000 |
| Total | 20,000 |
(c) Under the provisions of this section the taxpayer separates former Pool ABCD into two pools, Pool AB and Pool CD. The computation of the ratio of total base-year cost for each of the new pools to the base-year cost of the former pool is as follows:
| Item | Total base-year cost | Ratio |
|---|---|---|
| Pool AB: | ||
| A | $4,000 | |
| B | 3,000 | |
| 7,000 | 7,000/20,000 | |
| Pool CD: | ||
| C | 5,000 | |
| D | 8,000 | |
| 13,000 | 13,000/20,000 | |
| Total for pool ABCD | 20,000 |
(d) The ratio of the base-year cost of new Pools AB and CD to the base-year cost of former Pool ABCD is 7,000/20,000 and 13,000/20,000, respectively. The allocation of the January 1, 1956 base cost and subsequent yearly layers of increment of former Pool ABCD to new Pools AB and CD is as follows:
| Base-year cost to be allocated | Pool | ||
|---|---|---|---|
| AB | CD | ||
| Jan. 1, 1956, base cost | $10,000 | $3,500 | $6,500 |
| Dec. 31, 1956, increment | 1,000 | 350 | 650 |
| Dec. 31, 1958, increment | 5,000 | 1,750 | 3,250 |
| Dec. 31, 1960, increment | 4,000 | 1,400 | 2,600 |
| Total | 20,000 | 7,000 | 13,000 |
(e) The LIFO value of new Pools AB and CD at December 31, 1960, as allocated, is as follows:
| Dec. 31, 1960, inventory at Jan. 1, 1956, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
|---|---|---|---|
| Pool AB | |||
| Jan. 1, 1956, base cost | $3,500 | 100 | $3,500 |
| Dec. 31, 1956, increment | 350 | 110 | 385 |
| Dec. 31, 1958, increment | 1,750 | 20 | 2,100 |
| Dec. 31, 1960, increment | 1,400 | 125 | 1,750 |
| Total | 7,000 | 7,735 | |
| Pool CD | |||
| Jan. 1, 1956, base cost | 6,500 | 100 | 6,500 |
| Dec. 31, 1956, increment | 650 | 110 | 715 |
| Dec. 31, 1958, increment | 3,250 | 120 | 3,900 |
| Dec. 31, 1960, increment | 2,600 | 125 | 3,250 |
| Total | 13,000 | 14,365 |
(a) Assume the taxpayer has two pools at December 31, 1960. Under the provisions of this section the taxpayer combines these pools into a single pool as of January 1, 1961. The LIFO inventory value of each pool at December 31, 1960, is shown as follows:
| Dec. 31, 1960, inventory at Jan. 1, 1957, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
|---|---|---|---|
| Pool No. 1 | |||
| Jan. 1, 1956, base cost | $10,000 | 100 | $10,000 |
| Dec. 31, 1957, increment | 2,000 | 110 | 2,200 |
| Dec. 31, 1960, increment | 1,000 | 120 | 1,200 |
| Total | 13,000 | 13,400 | |
| Pool No. 2 | |||
| Jan. 1, 1957, base cost | 5,000 | 100 | 5,000 |
| Dec. 31, 1960, increment | 3,000 | 140 | 4,200 |
| Total | 8,000 | 9,200 |
(b) The computation of the ratio of the total current-year cost to the total base-year cost for the base year and each yearly layer of increment in the new pool is as follows:
| Pool | Base year 1957 | Increments | |
|---|---|---|---|
| Dec. 31, 1957 | Dec. 31, 1960 | ||
| No. 1: | |||
| Base-year cost | $10,000 | $2,000 | $1,000 |
| LIFO value | 10,000 | 2,200 | 1,200 |
| No. 2: | |||
| Base-year cost | 5,000 | 3,000 | |
| LIFO value | 5,000 | 4,200 | |
| Total, base-year cost | 15,000 | 2,000 | 4,000 |
| Total, LIFO value | 15,000 | 2,200 | 5,400 |
| Ratio of total current-year cost to total base-year cost (percent) | 100 | 110 | 135 |
(c) On the basis of the foregoing computations, the LIFO inventory of the new pool at December 31, 1960, is restated as follows:
| Dec. 31, 1960, inventory at Jan. 1, 1957, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
|---|---|---|---|
| Jan. 1, 1957, base cost | $15,000 | 100 | $15,000 |
| Dec. 31, 1957, increment | 2,000 | 110 | 2,200 |
| Dec. 31, 1960, increment | 4,000 | 135 | 5,400 |
| Total | 21,000 | 22,600 |
(a) Assume that the taxpayer has two pools at December 31, 1960. Under the provisions of this section the taxpayer combines these pools into a single pool as of January 1, 1961. The LIFO inventory value of each pool at December 31, 1960, is shown as follows:
| Dec. 31, 1960, inventory at Jan. 1, 1956, base-year cost | Ratio of total current rent-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
|---|---|---|---|
| Pool No. 1 | |||
| Jan. 1, 1956, base cost | $7,000 | 100 | $7,000 |
| Dec. 31, 1956, increment | 1,000 | 105 | 1,050 |
| Dec. 31, 1957, increment | 500 | 110 | 550 |
| Dec. 31, 1958, increment | 500 | 110 | 550 |
| Dec. 31, 1960, increment | 1,000 | 120 | 1,200 |
| Total | 10,000 | 10,350 | |
| Pool No. 2 | |||
| Jan. 1, 1958, base cost | 3,500 | 100 | 3,500 |
| Dec. 31, 1958, increment | 1,000 | 110 | 1,100 |
| Dec. 31, 1959, increment | 500 | 115 | 575 |
| Total | 5,000 | 5,175 |
(b) The next step is to redetermine the 1958 base-year cost for Pool No. 2 in terms of 1956 base-year cost. January 1, 1956 base-year unit cost must be reconstructed or established in accordance with paragraph (e)(2) of this section for each item in Pool No. 2. Such costs are assumed to be $9.00 for item A, $20.00 for item B, and $1.80 for item C. A ratio of the 1958 total base-year cost to the 1956 total base-year cost for Pool No. 2 is computed as follows:
| Item | Quantity | Jan. 1, 1956, base-year unit cost | Jan. 1, 1956, base-year cost |
|---|---|---|---|
| A | 250 | $9.00 | $2,250 |
| B | 75 | 20.00 | 1,500 |
| C | 500 | 1.80 | 900 |
| Total | 4,650 | ||
| A | 250 | 10.00 | 2,500 |
| B | 75 | 20.00 | 1,500 |
| C | 500 | 2.00 | 1,000 |
| Total | 5,000 |
(c) The ratio of the 1956 total base-year cost to the 1958 total base-year cost for Pool No. 2 is 4,650/5,000 or 93 percent. The January 1, 1958 base cost and each yearly layer of increment at 1958 base-year cost is multiplied by this ratio. Such computation is as follows:
| Dec. 31, 1960, inventory at Jan. 1, 1958, base-year cost | Ratio (percent) | Dec. 31, 1960, inventory restated at Jan. 1, 1956, base-year cost | |
|---|---|---|---|
| Jan. 1, 1958, base cost | $3,500 | 93 | $3,255 |
| Dec. 31, 1958, increment | 1,000 | 93 | 930 |
| Dec. 31, 1959, increment | 500 | 93 | 465 |
| Total | 4,650 |
(d) The computation of the ratio of the total current-year cost to the total base-year cost for the base year (1956) and each yearly layer of increment in the new pool is as follows:
| Pool | Base year 1956 | Increments | ||||
|---|---|---|---|---|---|---|
| Dec. 31, 1956 | Dec. 31, 1957 | Dec. 31, 1958 | Dec. 31, 1959 | Dec. 31, 1960 | ||
| No. 1: | ||||||
| Base-year cost | $7,000 | $1,000 | $500 | $500 | $1,000 | |
| LIFO value | 7,000 | 1,050 | 550 | 550 | 1,200 | |
| No. 2: | ||||||
| Base-year cost as restated | 3,255 | 930 | $465 | |||
| LIFO value | 3,500 | 1,100 | 575 | |||
| Total, base-year cost | 7,000 | 1,000 | 3,755 | 1,430 | 465 | 1,000 |
| Total, LIFO value | 7,000 | 1,050 | 4,050 | 1,650 | 575 | 1,200 |
| Ratio of total current-year cost to total base-year cost (percent) | 100.00 | 105.00 | 107.86 | 115.38 | 133.66 | 120.00 |
(e) On the basis of the foregoing computation, the LIFO inventory of the new pool at December 31, 1960, is restated as follows:
| Dec. 31, 1960, inventory at Jan. 1, 1956, base-year cost | Ratio of total current-year cost to total base-year cost (percent) | Dec. 31, 1960, inventory at LIFO value | |
|---|---|---|---|
| Jan. 1, 1956, base cost | $7,000 | 100.00 | $7,000 |
| Dec. 31, 1956, increment | 1,000 | 105.00 | 1,050 |
| Dec. 31, 1957, increment | 3,755 | 107.86 | 4,050 |
| Dec. 31, 1958, increment | 1,430 | 115.38 | 1,650 |
| Dec. 31, 1959, increment | 465 | 123.66 | 575 |
| Dec. 31, 1960, increment | 1,000 | 120.00 | 1,200 |
| Total | 14,650 | 15,525 |
[T.D. 6539, 26 FR 518, Jan. 20, 1961, as amended by T.D. 7814, 47 FR 11272, Mar. 16, 1982; T.D. 8976, 67 FR 1082, Jan. 9, 2002; 67 FR 5062, 5148, Feb. 4, 2002]
Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 472 Last-in, first-out inventories
- § 481 Adjustments required by changes in method of accounting
- § 446 General rule for methods of accounting
- § 381 Carryovers in certain corporate acquisitions
Regulations it cites
- § 1.472-1 Last-in, first-out inventories.
- § 1.446-1 General rule for methods of accounting.
- § 1.472-2 Requirements incident to adoption and use of LIFO inventory method.
- § 1.472-3 Time and manner of making election.
Cited by 8 other regulations
- § 1.263A-2 Rules relating to property produced by the taxpayer.
- § 1.263A-3 Rules relating to property acquired for resale.
- § 1.263A-7 Changing a method of accounting under section 263A.
- § 1.381(c)(5)-1 Inventory method.
- § 1.472-1 Last-in, first-out inventories.
- § 1.472-2 Requirements incident to adoption and use of LIFO inventory method.
- § 1.936-6 Intangible property income when an election out is made: Cost sharing and profit split options; covered intangibles.
- § 1.1502-17 Methods of accounting.
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Date not givenAmended (67 FR 5062)
- Amended by T.D. 8976 (67 FR 1082)
- Amended by T.D. 7814 (47 FR 11272)
- Issued by T.D. 6539 (26 FR 518)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Inventories
Nearby sections
- § 1.472-4 Adjustments to be made by taxpayer.
- § 1.472-5 Revocation of election.
- § 1.472-6 Change from LIFO inventory method.
- § 1.472-7 Inventories of acquiring corporations.
- § 1.472-8 Dollar-value method of pricing LIFO inventories.
- § 1.475-0 Table of contents.
- § 1.475(a)-3 Acquisition by a dealer of a security with a substituted basis.
- § 1.475(a)-4 Valuation safe harbor.
- § 1.475(b)-1 Scope of exemptions from mark-to-market requirement.