Method change from LIFO inventory method under Rev. Proc. 97-37.

• Author: Koroghlanian, Michelle R.
• Position: Last-in-first-out, IRS Revenue Procedure

Once the LIFO inventory method is adopted, IRS approval is needed to change to another inventory method. The rules governing how a taxpayer makes an automatic accounting method change from the LIFO inventory method were modified in 1997 by the issuance of a mass automatic method change procedure in Rev. Proc. 97-37 (the new procedure). Taxpayers who did not request a LIFO method change on or before Dec. 31, 1997 can no longer use Rev. Proc. 88-15 (the old procedure) to make an automatic method change from the LIFO method. In many respects, Rev. Proc. 97-37 simplifies or modifies the requirements for this automatic method change, as well as some of the terms and conditions. Now that the transitional rules of Rev. Proc. 97-37 are no longer applicable, it is a good time to review this automatic method change to ensure that taxpayers understand the rules that win apply if they qualify for (and decide to file) an automatic method change to discontinue the use of the LIFO inventory method.

Who Can Use the New Procedure?

As with Rev. Proc. 88-15, the new procedure only applies to taxpayers that want to change from the LIFO inventory method for tax purposes for all of their inventory currently accounted for under the LIFO method. If a taxpayer desires to change from the LIFO method for only a portion of its inventory currently accounted for under the LIFO method, it win need to request prior approval for the method change under Rev. Proc. 97-27.

In addition, restrictions apply if the taxpayer is under examination, before an Appeals office or before a Federal court. For example, taxpayers under examination may still file under Rev. Proc. 97-37 if they are within various window periods or if they obtain the consent of the district director. Taxpayers before an Appeals office or a Federal court may still be able to file under Rev. Proc. 97-37 if they certify that the same accounting method is not an issue under consideration by Appeals or the Federal court.

Further, if the applicant is treated as a partnership or an S corporation for Federal income tax purposes, it may not use the new procedure if, on the date a copy of the application is filed with the IRS, the LIFO method is under consideration in an examination of a partner, member or shareholder's Federal income tax return or is an issue under consideration by an Appeals office or by a Federal court with respect to a partner's, member's, or shareholder's Federal income tax return.

In the past, taxpayers may have been precluded from making an automatic change; the old procedure contained a restriction...