rp-98-49.pdf

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Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.602: Forms and instructions.
(Also Part I, §§ 446, 471, 472, 1.446-1, 1.471-8, 1.472-1.)
Rev. Proc. 98-49
SECTION 1. PURPOSE
This revenue procedure provides guidance to taxpayers that
use the dollar-value last-in, first-out (LIFO) inventory method
and the inventory price index computation (IPIC) method regarding
the computation of a percent change for the first taxable year in
which such percent change is computed with reference to a revised
CPI Detailed Report (CPI) or a PPI Detailed Report (PPI) for any
index category affected by such revisions. A revised CPI or PPI
is one that contains new index categories, eliminates some
previously reported index categories, resets the base year of
some index categories, or does not report the relative weights of
some index categories. Generally, under this revenue procedure,
any reasonable method of computing a percent change for a
selected index category affected by revisions to the CPI or PPI
will be accepted by the Internal Revenue Service. This revenue
procedure also provides a specific safe harbor method that will
be considered a reasonable method for these purposes.

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SECTION 2. BACKGROUND
.01 Section 472(a) of the Internal Revenue Code authorizes a
taxpayer to use the LIFO inventory method in accordance with
regulations prescribed by the Secretary.
.02 Section 1.472-8(a) of the Income Tax Regulations
provides that a taxpayer may elect to determine the cost of its
LIFO inventories under the dollar-value LIFO method, provided
that method is used consistently and clearly reflects the
taxpayer’s income.
.03 Section 1.472-8(e)(1) authorizes three methods for
computing the LIFO value of a dollar-value inventory pool: (1)
the double-extension method, (2) an index method, and (3) the
link-chain method.
.04 Section 1.472-8(e)(3)(i) authorizes the use of the IPIC
method to compute the LIFO value of a dollar-value inventory
pool. An inventory price index computed in the manner provided
in § 1.472-8(e)(3) will be accepted by the Commissioner as an
appropriate method of computing an index, and the use of such
index will be accepted as accurate, reliable, and suitable.
.05 Section 1.472-8(e)(3)(ii) provides that an inventory
price index computed under the IPIC method must be a stated
percentage of the percent change in the selected consumer or
producer price index or indexes. The stated percentage for a
taxpayer in a taxable year in which it is an eligible small
business is 100 percent of the percent change in the selected
price indexes. The stated percentage for all other taxpayers is

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80 percent of the percent change in the selected price indexes.
If it is necessary to select more than one specific consumer or
producer price index for an inventory pool, the stated percentage
of the percent change is the stated percentage of the weighted
average percent change for such indexes. Such weighed average is
computed by reference to the relative amounts of current-year
costs in the inventory pool for each index category of goods.
.06 Section 1.472-8(e)(3)(iii) describes the process for
selecting consumer and producer price indexes under the IPIC
method. Inventory items in each of the taxpayer’s pools are
classified according to the detailed listings in the appropriate
tables of the CPI or PPI (formerly known as Producer Prices and
Price Indexes) and assigned to various index categories.
§ 1.472-8(e)(3)(iii)(B). Indexes and weights published by the
United States Bureau of Labor Statistics (BLS) are used to
compute the percent change for each index category to which
inventory items have been assigned. Id. In many cases, the
selected index for an index category must be converted into a
cost price index prior to the computation of the percent change
for the index category. § 1.472-8(e)(3)(iii)(C). In the case of
a taxpayer using the retail inventory method, the index selected
must be the index as of the last month of the taxpayer's taxable
year. Id. Taxpayers that do not use the retail method must
select indexes as of the month or months most appropriate to the
taxpayer's method of determining the current-year cost of the
inventory pool under § 1.472-8(e)(2)(ii), or make a one-time

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binding election of an appropriate representative month during
the taxable year. Id.
.07 The BLS frequently makes changes to the categories
included in the CPI or PPI. For example, the BLS revised the
categories of goods listed in the January 1998 CPI by introducing
some new categories as of January 1998 and eliminating or
resetting some existing categories as of December 1997.
Consequently, January 1999 will be the first month for which it
is possible to compute a percent change for a 12-month period
with reference to the BLS published indexes for any affected
index category (as described in section 3 of this revenue
procedure). Moreover, the BLS did not publish weights for some
index categories.
SECTION 3. SCOPE
This revenue procedure applies to a taxpayer that uses the
dollar-value LIFO inventory and IPIC methods pursuant to § 1.472-
8(e)(3) for any taxable year in which a percent change for an
index category for the 12-month period ending with the
appropriate index month, as defined in § 1.472-8(e)(iii)(C)
("index month"), (or, in the case of a short taxable year, the
applicable period) cannot be computed by the taxpayer in strict
conformity with § 1.472-8(e)(3)(ii) or (iii) because of revisions
to the CPI or PPI as described in section 2.07 of this revenue
procedure (Aaffected index category@).

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SECTION 4. APPLICATION
A taxpayer described in section 3 of this revenue procedure
may use any reasonable method of computing a percent change for
each affected index category, provided such method is used
consistently for all affected index categories within a
particular taxable year. The procedure for computing a percent
change for an affected index category set forth in section 5 of
this revenue procedure is deemed to be a reasonable method for
these purposes.
SECTION 5. PROCEDURE
.01 When a revised CPI or PPI includes new index categories
or eliminates or resets old index categories, a taxpayer may
compute a total percent change for each affected index category
represented in the taxpayer’s ending inventory in accordance with
the procedure provided in this section 5.01. This total percent
change will be a combination of the percent change for the second
portion of the taxable year based on the revised index category
and the corresponding percent change for the first portion of the
taxable year based on the old index category.
(1) A taxpayer must first compute the percent change
for each affected index category set forth in the revised CPI or
PPI for the period between the first month covered by the revised
CPI or PPI and the index month ("the second portion") as follows:
(a) Using the appropriate table of the revised CPI
or PPI for the index month, all specific inventory items must be
placed in the most detailed index category that includes that

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specific inventory item (without regard to the index selection
requirements in § 1.472-8(e)(3)(iii)(B)).
(b) The percent change of each revised CPI or PPI
index category for the second portion is determined using the
following formula:
[(A-B) / B) * 100]
where:
A = Cumulative index for index month (adjusted, as
necessary, to reflect a cost or retail price index)
B = Cumulative index for last month of old CPI or PPI as
published for the first month of revised CPI or PPI
(adjusted, as necessary, to reflect a cost or retail
price index).
(2) A taxpayer must then compute a percent change for
each affected index category set forth in the old CPI or PPI for
the period between the preceding year's index month and the last
month covered by the old CPI or PPI ("the first portion") as
follows:
(a) Using the appropriate table of the old CPI or
PPI for the preceding year’s index month, all specific inventory
items must be placed in the most detailed index category that
includes that specific inventory item (without regard to the
index selection requirements of § 1.472-8(e)(3)(iii)(B)).
(b) The percent change of each old CPI or PPI
index category for the first portion is determined using the
following formula:

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[(C-D) / D) * 100]
where:
C = Cumulative index for last month of old CPI or PPI as
published for the last month of old CPI or PPI
(adjusted, as necessary, to reflect a cost or retail
price index)
D =Cumulative index for preceding year’s index month
(adjusted, as necessary, to reflect a cost or retail
price index).
(3) The taxpayer will then determine the total percent
change for each index category set forth in the revised CPI or
PPI represented in the ending inventory by combining the percent
change for the second portion with the corresponding percent
change for the first portion using the following formula:
({[(X + 100) * (Y + 100)] / 100} - 100)
where:
X = Percent change for the second portion
Y = Percent change for the first portion.
For purposes of computing the total percent change for each
revised CPI or PPI index category, the corresponding percent
change for the first portion is the percent change for the old
CPI or PPI index category that includes the specific inventory
item(s) included in the revised CPI or PPI index category. If
specific inventory items included in a single revised CPI or PPI
index category were separately included in different old CPI or
PPI index categories, the corresponding percent change for the

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first portion is the weighted average percent change of such old
CPI or PPI percent changes. The costs to be used in computing
such weighted average must be the relative current-year costs in
ending inventory.
.02 When § 1.472-8(e)(3)(iii)(B)(5) requires a taxpayer to
compute a percent change for a selected index category using the
BLS weights and the CPI or PPI does not report the relative
weights for one or more of the taxpayer’s detailed index
categories within a selected index category, the taxpayer may
weight the detailed index categories actually present in its
ending inventory within such selected index category using the
taxpayer’s actual inventory weights.
SECTION 6. EXAMPLE
.01 The following example illustrates the index selection
and computation procedure described in section 5 of this revenue
procedure. X, a retailer, uses the retail inventory method along
with the dollar-value LIFO and IPIC inventory methods and files
its returns on the basis of a taxable year ending on January 31.
Under § 1.472-8(e)(3)(iii)(C), X is required to select indexes
from the CPI as of January, the last month of X's taxable year.
X has five items in its only dollar-value LIFO pool on January
31, 1998 -- tomatoes, bananas, lemons, oranges, and peaches. The
retail selling prices of the goods were tomatoes, $1,000;
bananas, $80; lemons, $50; oranges, $50; and peaches, $20.
.02 Pursuant to § 1.472-8(e)(3)(iii)(B), X assigns the items
to the most detailed listings in the January 1998 CPI as follows:

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tomatoes are assigned to ATomatoes@; bananas are assigned to
"Bananas;" lemons are assigned to "Citrus fruits;" oranges are
assigned to "Oranges, including tangerines;" and peaches are
assigned to "Other fresh fruits."
.03 X selects the index for ATomatoes@ because tomatoes
represent more than 10% of its total inventory value. §§ 1.472-
8(e)(3)(iii)(B)(1) and (4). X can compute a total percent change
for ATomatoes@ in accordance with §§ 1.472-8(e)(3)(ii) and (iii)
using the information contained in the CPI for January 1997 and
January 1998. Thus, the ATomatoes@ index category is not an
affected index category, and X must compute the total percent
change for that index category in accordance with §§ 1.472-
8(e)(3)(ii) and (iii). Because no remaining detailed index
category contains 10% or more of X’s total inventory value, X
must investigate successively less detailed index category
levels. § 1.472-8(e)(3)(iii)(B)(2). X discovers that the
remainder of its inventory fits within the AFresh fruits@ index
category. X, however, may not use the published AFresh fruits@
index for the remainder of its goods, because X’s inventory does
not include apples. § 1.472-8(e)(3)(iii)(B)(5). X must compute
a percent change for the AFresh fruits@ index category using the
BLS indexes and weights published for the detailed index
categories actually present in its inventory. Id. However, the
BLS did not publish a cumulative index for ACitrus fruits@ in the
January 1997 CPI or weights for AOranges, including tangerines@
in the January 1998 CPI. Moreover, the BLS reset the base year

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for AOther fresh fruits@ in the January 1998 CPI. Since X cannot
compute a total percent change for AFresh fruits@ in strict
conformity with §§ 1.472-8(e)(3)(ii) and (iii), X chooses to
compute such total percent change using the method described in
section 5 of this revenue procedure.
.04 Pursuant to section 5.01(1)(a) of this revenue
procedure, X assigns the inventory items within the affected
AFresh fruits@ category to the most detailed index categories in
the 1998 CPI as follows: bananas are assigned to "Bananas;"
lemons are assigned to "Citrus fruits;" oranges are assigned to
"Oranges, including tangerines;" and peaches are assigned to
"Other fresh fruits." Pursuant to section 5.01(1)(b) of this
revenue procedure, X computes the percent changes for the second
portion as follows:
1998
Items Category Computation % Change
bananas Bananas = [(154.7 - 151.5) / 151.5)] * 100 = 2.1122
lemons Citrus f= [(105.6 - 100.0) / 100.0)] * 100 = 5.6000
oranges Oranges = [(201.3 - 189.3) / 189.3)] * 100 = 6.3391
peaches Other ff= [( 96.6 - 100.0) / 100.0)] * 100 = -3.4000
.05 Pursuant to section 5.01(2)(a) of this revenue
procedure, X assigns the items to the most detailed index
categories in the January 1997 CPI as follows: bananas are
assigned to "Bananas;" lemons are assigned to "Other fresh
fruits;" oranges are assigned to "Oranges, including tangerines;"
and peaches are assigned to "Other fresh fruits." Pursuant to
section 5.01(2)(b) of this revenue procedure, X computes the
percent changes for the first portion as follows:

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1997
Items Category Computation % Change
bananas Bananas = [(151.5 - 161.9) / 161.9)] * 100 = -6.4237
lemons Other ff= [(294.9 - 290.2) / 290.2)] * 100 = 1.6196
oranges Oranges = [(189.3 - 187.4) / 187.4)] * 100 = 1.0139
peaches Other ff= [(294.9 - 290.2) / 290.2)] * 100 = 1.6196
.06 Pursuant to section 5.01(3) of this revenue procedure, X
computes the total percent change for each 1998 CPI detailed
index category by combining the corresponding percent changes for
the first and second portions as follows:
1998
Category Computation % Change
Bananas = {[(102.1122 * 93.5763) / 100] - 100} = -4.4472
Citrus f = {[(105.6000 * 101.6196) / 100] - 100} = 7.3103
Oranges = {[(106.3391 * 101.0139) / 100] - 100} = 7.4173
Other ff = {[( 96.6000 * 101.6196) / 100] - 100} = -1.8355
Because the BLS published the total percent change for ABananas@
and AOranges, including tangerines@ in the January 1998 CPI, it
was not necessary for X to compute a total percent change for
those detailed index categories pursuant to section 5.01 of this
revenue procedure.
.07 Pursuant to section 5.02 of this revenue procedure, X
computes the weights for each 1998 CPI detailed index category as
follows:
Detailed Selected
1998 Category Category
Detailed Category Cost Cost Weight
Bananas = $80 / $200 = 0.40
Citrus fruits = $50 / $200 = 0.25
Oranges = $50 / $200 = 0.25
Other fresh fruits = $20 / $200 = 0.10
Then, X weights the percent change for each 1998 CPI detailed
index category and adds them together to determine the total
percent change for the AFresh fruits@ index category as follows:

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1998 Weighted
Detailed Category Weight% Change% Change
Bananas = 0.40 x -4.4472 = -1.7789
Citrus fruits = 0.25 x 7.3103 = 1.8276
Oranges = 0.25 x 7.4173 = 1.8543
Other fresh fruits = 0.10 x -1.8355 = -0.1836
Total Percent Change +1.7194
SECTION 7. METHOD OF ACCOUNTING
The selection of a new consumer or producer price index for
a specific inventory item to compute an inventory price index as
a result of revisions to the CPI or PPI as described in section
2.07 of this revenue procedure will not be treated as a change in
method of accounting. Any other change in the selection of a
consumer or producer price index for a specific inventory item is
a change in method of accounting for which the taxpayer must
secure the consent of the Commissioner as provided in § 446(e).
See § 1.472-8(e)(3)(iii)(B).
DRAFTING INFORMATION
The principal author of this revenue procedure is Jeffery G.
Mitchell of the Office of Assistant Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue
procedure, contact Mr. Mitchell on (202) 622-4970 (not a toll
free call).