26 U.S.C. § 471 — General rule for inventories

Page 1646 TITLE 26—INTERNAL REVENUE CODE § 471 see section 7(e) of Pub. L. 110–172, set out as a note under section 1092 of this title. EFFECTIVE DATE Pub. L. 108–357, title VIII, § 849, Oct. 22, 2004, 118 Stat. 1606, as amended by Pub. L. 109–135, title IV, § 403(ff), Dec. 21, 2005, 119 Stat. 2631, provided that: ‘‘(a) IN GENERAL.—Except as provided in this section, the amendments made by this part [part III (§§ 847–849) of subtitle B of title VIII of Pub. L. 108–357, enacting this section and amending sections 167, 168, and 197 of this title] shall apply to leases entered into after March 12, 2004, and in the case of property treated as tax-ex- empt use property other than by reason of a lease, to property acquired after March 12, 2004. ‘‘(b) EXCEPTION.— ‘‘(1) IN GENERAL.—The amendments made by this part shall not apply to qualified transportation prop- erty. ‘‘(2) QUALIFIED TRANSPORTATION PROPERTY.—For purposes of paragraph (1), the term ‘qualified trans- portation property’ means domestic property subject to a lease with respect to which a formal applica- tion— ‘‘(A) was submitted for approval to the Federal Transit Administration (an agency of the Depart- ment of Transportation) after June 30, 2003, and be- fore March 13, 2004, ‘‘(B) is approved by the Federal Transit Adminis- tration before January 1, 2006, and ‘‘(C) includes a description of such property and the value of such property. ‘‘(3) EXCHANGES AND CONVERSION OF TAX-EXEMPT USE PROPERTY.—Section 470(e)(4) of the Internal Revenue Code of 1986, as added by section 848, shall apply to property exchanged or converted after the date of the enactment of this Act [Oct. 22, 2004]. ‘‘(4) INTANGIBLES AND INDIAN TRIBAL GOVERN- MENTS.—The amendments made subsections (b)(2), (b)(3), and (e) of section 847 [amending sections 167, 168, and 197 of this title], and the treatment of prop- erty described in clauses (ii) and (iii) of section 470(c)(2)(B) of the Internal Revenue Code of 1986 (as added by section 848) as tangible property, shall apply to leases entered into after October 3, 2004.’’ SUBPART D—INVENTORIES Sec. 471. General rule for inventories. 472. Last-in, first-out inventories. 473. Qualified liquidations of LIFO inventories. 474. Simplified dollar-value LIFO method for cer- tain small businesses. 475. Mark to market accounting method for deal- ers in securities. Editorial Notes AMENDMENTS 1993—Pub. L. 103–66, title XIII, § 13223(b)(2), Aug. 10, 1993, 107 Stat. 484, added item 475. 1986—Pub. L. 99–514, title VIII, § 802(b), Oct. 22, 1986, 100 Stat. 2350, substituted ‘‘Simplified dollar-value LIFO method for certain small businesses’’ for ‘‘Elec- tion by certain small businesses to use one inventory pool’’ in item 474. 1981—Pub. L. 97–34, title II, § 237(b), Aug. 13, 1981, 95 Stat. 253, added item 474. 1980—Pub. L. 96–223, title IV, § 403(a)(2), Apr. 2, 1980, 94 Stat. 304, added item 473. § 471. General rule for inventories (a) General rule Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inven- tories shall be taken by such taxpayer on such basis as the Secretary may prescribe as con- forming as nearly as may be to the best ac- counting practice in the trade or business and as most clearly reflecting the income. (b) Estimates of inventory shrinkage permitted A method of determining inventories shall not be treated as failing to clearly reflect income solely because it utilizes estimates of inventory shrinkage that are confirmed by a physical count only after the last day of the taxable year if— (1) the taxpayer normally does a physical count of inventories at each location on a reg- ular and consistent basis, and (2) the taxpayer makes proper adjustments to such inventories and to its estimating methods to the extent such estimates are greater than or less than the actual shrinkage. (c) Exemption for certain small businesses (1) In general In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year— (A) subsection (a) shall not apply with re- spect to such taxpayer for such taxable year, and (B) the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect in- come if such method either— (i) treats inventory as non-incidental materials and supplies, or (ii) conforms to such taxpayer’s method of accounting reflected in an applicable fi- nancial statement of the taxpayer with re- spect to such taxable year or, if the tax- payer does not have any applicable finan- cial statement with respect to such tax- able year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures. (2) Applicable financial statement For purposes of this subsection, the term ‘‘applicable financial statement’’ has the meaning given the term in section 451(b)(3). (3) Application of gross receipts test to individ- uals, etc. In the case of any taxpayer which is not a corporation or a partnership, the gross re- ceipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or part- nership. (4) Coordination with section 481 Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary. (d) Cross reference For rules relating to capitalization of direct and indirect costs of property, see section 263A. (Aug. 16, 1954, ch. 736, 68A Stat. 159; Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Page 1647 TITLE 26—INTERNAL REVENUE CODE § 472 Stat. 1834; Pub. L. 99–514, title VIII, § 803(b)(4), Oct. 22, 1986, 100 Stat. 2356; Pub. L. 105–34, title IX, § 961(a), Aug. 5, 1997, 111 Stat. 891; Pub. L. 115–97, title I, § 13102(c), Dec. 22, 2017, 131 Stat. 2103.) Editorial Notes AMENDMENTS 2017—Subsecs. (c), (d). Pub. L. 115–97 added subsec. (c) and redesignated former subsec. (c) as (d). 1997—Subsecs. (b), (c). Pub. L. 105–34 added subsec. (b) and redesignated former subsec. (b) as (c). 1986—Pub. L. 99–514 designated existing provisions as subsec. (a) and added subsec. (b). 1976—Pub. L. 94–455 struck out ‘‘or his delegate’’ after ‘‘Secretary’’ wherever appearing. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13102(e) of Pub. L. 115–97, set out as a note under section 263A of this title. EFFECTIVE DATE OF 1997 AMENDMENT Pub. L. 105–34, title IX, § 961(b)(1), Aug. 5, 1997, 111 Stat. 891, provided that: ‘‘The amendment made by this section [amending this section] shall apply to taxable years ending after the date of the enactment of this Act [Aug. 5, 1997].’’ EFFECTIVE DATE OF 1986 AMENDMENT If any interest costs incurred after Dec. 31, 1986, are attributable to costs incurred before Jan. 1, 1987, the amendment by Pub. L. 99–514 is applicable to such in- terest costs only to the extent such interest costs are attributable to costs which were required to be capital- ized under section 263 of the Internal Revenue Code of 1954 and which would have been taken into account in applying section 189 of the Internal Revenue Code of 1954 (as in effect before its repeal by section 803 of Pub. L. 99–514) or, if applicable, section 266 of such Code, see section 7831(d)(2) of Pub. L. 101–239, set out as an Effec- tive Date note under section 263A of this title. Amendment by Pub. L. 99–514 applicable to costs in- curred after Dec. 31, 1986, in taxable years ending after such date, except as otherwise provided, see section 803(d) of Pub. L. 99–514, set out as an Effective Date note under section 263A of this title. COORDINATION WITH SECTION 481 Pub. L. 105–34, title IX, § 961(b)(2), Aug. 5, 1997, 111 Stat. 891, provided that: ‘‘In the case of any taxpayer permitted by this section [amending this section and enacting provisions set out as a note above] to change its method of accounting to a permissible method for any taxable year— ‘‘(A) such changes shall be treated as initiated by the taxpayer, ‘‘(B) such changes shall be treated as made with the consent of the Secretary of the Treasury, and ‘‘(C) the period for taking into account the adjust- ments under section 481 [26 U.S.C. 481] by reason of such change shall be 4 years.’’ STUDY OF ACCOUNTING METHODS FOR INVENTORY; REPORT NOT LATER THAN DECEMBER 31, 1982 Pub. L. 97–34, title II, § 238, Aug. 13, 1981, 95 Stat. 254, directed Secretary of the Treasury to conduct a study of methods of tax accounting for inventory with a view towards development of simplified methods and to re- port to Congress, not later than Dec. 31, 1982, prior to repeal by Pub. L. 100–647, title VI, § 6252(a)(2), Nov. 10, 1988, 102 Stat. 3752. § 472. Last-in, first-out inventories (a) Authorization A taxpayer may use the method provided in subsection (b) (whether or not such method has been prescribed under section 471) in inventorying goods specified in an application to use such method filed at such time and in such manner as the Secretary may prescribe. The change to, and the use of, such method shall be in accordance with such regulations as the Sec- retary may prescribe as necessary in order that the use of such method may clearly reflect in- come. (b) Method applicable In inventorying goods specified in the applica- tion described in subsection (a), the taxpayer shall: (1) Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the tax- able year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year; (2) Inventory them at cost; and (3) Treat those included in the opening in- ventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method. (c) Condition Subsection (a) shall apply only if the taxpayer establishes to the satisfaction of the Secretary that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of subsection (b) in inventorying such goods to as- certain the income, profit, or loss of the first taxable year for which the method described in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year— (1) to shareholders, partners, or other propri- etors, or to beneficiaries, or (2) for credit purposes. (d) 3-year averaging for increases in inventory value The beginning inventory for the first taxable year for which the method described in sub- section (b) is used shall be valued at cost. Any change in the inventory amount resulting from the application of the preceding sentence shall be taken into account ratably in each of the 3 taxable years beginning with the first taxable year for which the method described in sub- section (b) is first used. (e) Subsequent inventories If a taxpayer, having complied with subsection (a), uses the method described in subsection (b) for any taxable year, then such method shall be used in all subsequent taxable years unless— (1) with the approval of the Secretary a change to a different method is authorized; or, (2) the Secretary determines that the tax- payer has used for any such subsequent tax- able year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the appli- cation to ascertain the income, profit, or loss