Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

section 1.471-9. Both of these regulations state that IRC section 381(c)(5) and the regulations
thereunder prescribe the rules for valuing inventories acquired in certain corporate
reorganizations.
Treas. Reg. section 1.472-8 contains the rules for the use of the dollar value method. These rules
are relegated to eight subparagraphs in the regulations. Below is a summary of these eight
subparagraphs.
Paragraph (a) provides for the election of dollar value LIFO and then explains the conceptual
basis underlying the method.
Paragraph (b) spells out the pooling rules for taxpayers engaged in manufacturing.
Paragraph (c) contains the pooling rules for retailers and wholesalers.
Paragraph (d) reserves for the Commissioner the right to determine the appropriate number and
composition of the dollar value pools.
Paragraph (e) describes and explains the various dollar value methods available to the taxpayer.
Paragraph (f) prescribes the rules for changing from another LIFO method to dollar value (i.e.,
from specific goods to dollar value).
Paragraph (g) sets forth the rules for combining or splitting up dollar value pools.
The LIFO Election
In adopting LIFO, an election must be made to use the method. Such election is not
automatically granted. To make the election, the following must be done:
1. Form 970, "Application to Use LIFO Method," or its equivalent must be completed, signed
and attached to the return filed for the year of election. Its equivalent means that if the
taxpayer does not file a Form 970, but attaches a schedule supplying all the necessary
information, the taxpayer will be deemed to be in compliance.
2. A 3 year inventory analysis must be made for any increase in inventory value. Restatement of
any other inventory value being used to state actual cost must be disclosed.
3. A statement describing computations and calculation of the index must be made. If electing
the Index method, or the use of the Link Chain method is employed, an additional statement
with justification must be submitted.
A taxpayer adopting the LIFO method is bound by the election. An amended return cannot be
filed to revoke the election. Terminating or modifying the use of an elected LIFO method
requires the advance approval of the Commissioner although some changes are automatic under
8-15