[Federal Register Volume 81, Number 228 (Monday, November 28, 2016)]
[Proposed Rules]
[Pages 85450-85455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28375]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-125946-10]
RIN 1545-BJ66


Dollar-Value LIFO Regulations: Inventory Price Index Computation 
(IPIC) Method Pools

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that relate to the 
establishment of dollar-value last-in, first-out (LIFO) inventory pools 
by certain taxpayers that use the inventory price index computation 
(IPIC) pooling method. The proposed regulations provide rules regarding 
the proper pooling of manufactured or processed goods and wholesale or 
retail (resale) goods. The proposed regulations would affect taxpayers 
who use the IPIC pooling method and whose inventory for a trade or 
business consists of manufactured or processed goods and resale goods.

DATES: Comments and requests for a public hearing must be received by 
February 27, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-125946-10), Room 
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
125946-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov/ (IRS REG-125946-10).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Natasha M. Mulleneaux, (202) 317-7007; concerning submission of 
comments and requests for a public hearing, Regina Johnson, (202) 317-
6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    Section 472 of the Internal Revenue Code permits a taxpayer to 
account for inventories using the LIFO method of accounting. The LIFO 
method of accounting for goods treats inventories on hand at the end of 
the year as consisting first of inventory on hand at the beginning of 
the year and then of inventories acquired during the year.
    Section 1.472-8(a) of the Income Tax Regulations (26 CFR part 1) 
provides that any taxpayer may elect to determine the cost of its LIFO 
inventories using the dollar-value method, provided such method is used 
consistently and clearly reflects income. The dollar-value method of 
valuing LIFO inventories is a method of determining cost by using 
``base-year'' cost expressed in terms of total dollars rather than the 
quantity and price of specific goods as the unit of measurement. The 
``base-year'' cost is the aggregate of the cost (determined as of the 
beginning of the tax year for which the LIFO method is first adopted) 
of all items in a pool.
    Pooling is central to the operation of the dollar-value LIFO 
method. Pooling requires costs related to different inventory products 
to be grouped into one or more inventory pools. To determine whether 
there is an increment or liquidation in a pool for a particular taxable 
year, the end of the year inventory of the pool expressed in terms of 
base-year cost is compared with the beginning of the year inventory of 
the pool expressed in terms of base-year cost. The regulations 
prescribe rules for determining whether the number and composition of 
the pools used by the taxpayer are appropriate. The rules vary 
depending upon whether the taxpayer is engaged in the activity of 
manufacturing or processing or the activity of wholesaling or 
retailing.

[[Page 85451]]

    The general pooling rules applicable to dollar-value LIFO taxpayers 
are in Sec.  1.472-8(b) and (c). These paragraphs provide separate 
pooling principles for taxpayers engaged in the manufacturing or 
processing of goods (Sec.  1.472-8(b)), and for taxpayers engaged in 
the wholesaling or retailing of goods purchased from others (Sec.  
1.472-8(c)).
    Section 1.472-8(b)(1) requires a manufacturer or processor to 
establish one pool for each natural business unit (natural business 
unit pooling method) unless the manufacturer or processor elects under 
Sec.  1.472-8(b)(3) to establish multiple pools. Further, Sec.  1.472-
8(b)(2) provides that where a manufacturer or processor is also engaged 
in the wholesaling or retailing of goods purchased from others, the 
wholesaling or retailing operations with respect to such purchased 
goods shall not be considered a part of any manufacturing or processing 
unit. Additionally, Sec.  1.472-8(b)(1) requires that where the 
manufacturer or processor is also engaged in the wholesaling or 
retailing of goods purchased from others, any pooling of the LIFO 
inventory of such purchased goods for wholesaling and retailing 
operations shall be determined in accordance with Sec.  1.472-8(c).
    In Amity Leather Products Co. v. Commissioner, 82 T.C. 726 (1984), 
the Tax Court considered whether a taxpayer that used the natural 
business unit pooling method was subject to the separate pooling 
requirements by virtue of being both a manufacturer and a wholesaler or 
retailer of merchandise. The court concluded that requiring separate 
inventory accounting for the two functions was reasonable and held 
that, where the taxpayer manufactured goods and regularly purchased 
identical goods from a subsidiary for resale, it was required to 
maintain separate pools for manufactured and purchased inventory.
    A manufacturer or processor using the natural business unit pooling 
method may elect to use the multiple pooling method described in Sec.  
1.472-8(b)(3) for inventory items that are not within a natural 
business unit. Alternatively, a manufacturer or processor that does not 
use the natural business unit pooling method may elect to use the 
multiple pooling method. Under the multiple pooling method, generally 
each pool should consist of a group of inventory items that are 
substantially similar. Thus, raw materials that are substantially 
similar should be pooled together. Similarly, finished goods and goods-
in-process should be placed in pools classified by major classes or 
types of goods.
    Section 1.472-8(c)(1) requires wholesalers, retailer, jobbers, and 
distributors to establish inventory pools by major lines, types, or 
classes of goods. Mirroring Sec.  1.472-8(b)(1), Sec.  1.472-8(c)(1) 
requires that where a wholesaler or retailer is also engaged in the 
manufacturing or processing of goods, the pooling of the LIFO inventory 
for the manufacturing or processing operations must be determined in 
accordance with Sec.  1.472-8(b).
    In general, any taxpayer that elects to use the dollar-value LIFO 
method to value LIFO inventories may elect to use the IPIC method to 
compute the base-year cost and determine the LIFO value of a dollar-
value pool for a trade or business. A taxpayer that elects to use the 
IPIC method of determining the value of a dollar-value LIFO pool for a 
trade or business may also elect to establish dollar-value pools, for 
those items accounted for using the IPIC method, using the IPIC pooling 
method provided in Sec.  1.472-8(b)(4) and (c)(2). Section 1.472-
8(b)(4) governs the application of the IPIC pooling method to 
manufacturers and processors that elect to use the IPIC method for a 
trade or business. Section 1.472-8(c)(2) governs the application of the 
IPIC pooling method to wholesalers, retailers, jobbers, and 
distributors that elect to use the IPIC method for a trade or business.
    For manufacturers and processors using the IPIC pooling method 
under Sec.  1.472-8(b)(4), pools may be established for those items 
accounted for using the IPIC method based on the 2-digit commodity 
codes (that is, major commodity groups) in Table 9 (formerly Table 6) 
of the Producer Price Index Detailed Report (PPI Detailed Report), 
which is published monthly by the United States Bureau of Labor 
Statistics (BLS). A taxpayer establishing IPIC pools under Sec.  1.472-
8(b)(4) may combine IPIC pools that comprise less than 5 percent of the 
total inventory value of all dollar-value pools to form a single 
miscellaneous IPIC pool. If the resulting miscellaneous IPIC pool is 
less than 5 percent of the total inventory value of all dollar-value 
pools, the taxpayer may combine the miscellaneous IPIC pool with its 
largest IPIC pool.
    For retailers using the IPIC pooling method under Sec.  1.472-
8(c)(2), pools may be established for those purchased items accounted 
for using the IPIC method based on either the general expenditure 
categories (that is, major groups) in Table 3 of the Consumer Price 
Index Detailed Report (CPI Detailed Report), published monthly by BLS, 
or the 2-digit commodity codes (that is, major commodity groups) in 
Table 9 of the PPI Detailed Report. For wholesalers, jobbers, or 
distributors using the IPIC pooling method under Sec.  1.472-8(c)(2), 
pools may be established for those items accounted for using the IPIC 
method based on the 2-digit commodity codes in Table 9 of the PPI 
Detailed Report. A taxpayer establishing IPIC pools under Sec.  1.472-
8(c)(2) may combine pools that comprise less than 5 percent of the 
total inventory value of all dollar-value pools to form a single 
miscellaneous IPIC pool. If the resulting miscellaneous IPIC pool is 
less than 5 percent of the total inventory value of all dollar-value 
pools, the taxpayer may combine the miscellaneous IPIC pool with its 
largest IPIC pool.
    Each of the 5-percent rules provided in Sec.  1.472-8(b)(4) or 
(c)(2) is a method of accounting. Thus, a taxpayer may not change to, 
or cease using either 5-percent rule without obtaining the prior 
consent of the Commissioner. Whether a specific IPIC pool or the 
miscellaneous IPIC pool satisfies the applicable 5-percent rule must be 
determined in the year of adoption or year of change (whichever is 
applicable) and redetermined every third taxable year. Any change in 
pooling required or permitted under a 5-percent rule is also a change 
in method of accounting. A taxpayer must secure the consent of the 
Commissioner before combining or separating pools. The general 
procedures under section 446(e) and Sec.  1.446-1(e) that a taxpayer 
must follow to obtain the consent of the Commissioner to change a 
method of accounting for federal income tax purposes are contained in 
Rev. Proc. 2015-13, 2015-5 I.R.B. 419 (or its successors), as modified 
by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067. See Sec.  
601.601(d)(2)(ii)(b).
    The general pooling rules of Sec.  1.472-8(b) and (c) provide that 
where a taxpayer is engaged in both a manufacturing or processing 
activity and a wholesaling or retailing activity, separate pooling 
rules apply to the separate activities, and goods purchased for resale 
may not be included in the same pool as manufactured or purchased 
goods. On the other hand, the IPIC pooling rules address circumstances 
where a trade or business consists entirely of a manufacturing, 
processing, retailing, or wholesaling activity. The Treasury Department 
and the IRS have become aware of confusion concerning how the IPIC 
pooling rules apply where a taxpayer is engaged in both a manufacturing 
or processing activity and a wholesaling or retailing

[[Page 85452]]

activity. Accordingly, these proposed regulations address this issue.

Explanation of Provisions

Changes to IPIC Pooling Rules

    The proposed regulations amend the IPIC pooling rules to clarify 
that those rules are applied consistently with the general LIFO pooling 
rule that manufactured or processed goods and resale goods may not be 
included in the same dollar-value LIFO pool. This general rule is 
intended to limit cost transference, an inherent problem with pooling. 
Cost transference may occur, among other circumstances, when inventory 
items from separate economic activities (for example, manufacturing and 
resale activities) are placed in the same pool and may cause 
misallocation of cost or distortion of income.
    Accordingly, the proposed regulations clarify that an IPIC-method 
taxpayer who elects the IPIC pooling method described in Sec.  1.472-
8(b)(4) or (c)(2) and whose trade or business consists of both 
manufacturing or processing activity and resale activity may not 
commingle the manufactured or processed goods and the resale goods 
within the same IPIC pool.
    Specifically, the proposed regulations provide that a manufacturer 
or processor using the IPIC pooling method under Sec.  1.472-8(b)(4) 
that is also engaged, within the same trade or business, in wholesaling 
or retailing goods purchased from others may elect to establish dollar-
value pools for the manufactured or processed items accounted for using 
the IPIC method based on the 2-digit commodity codes in Table 9 of the 
PPI Detailed Report. If the manufacturer or processor makes this 
election, the manufacturer or processor must also establish pools for 
its resale goods in accordance with Sec.  1.472-8(c)(2) (that is, based 
on the general expenditure categories in Table 3 of the CPI Detailed 
Report in the case of a retailer or the 2-digit commodity codes in 
Table 9 of the PPI Detailed Report in the case of a retailer, 
wholesaler, jobber, or distributor).
    If the manufacturer or processor chooses to use the 5-percent 
method of pooling, manufactured or processed IPIC pools (IPIC pools 
consisting of manufactured or processed goods) of less than 5 percent 
of the total current year cost of all dollar-value pools may be 
combined to form a single miscellaneous IPIC pool of manufactured or 
processed goods. The manufacturer or processor may also combine resale 
IPIC pools (IPIC pools consisting of resale goods) of less than 5 
percent of the total value of inventory to form a single miscellaneous 
IPIC pool of resale goods. If the miscellaneous IPIC pool of 
manufactured or processed goods is less than 5 percent of the total 
value of inventory, the manufacturer or processor may combine the 
miscellaneous IPIC pool of manufactured or processed goods with its 
largest manufactured or processed IPIC pool. The miscellaneous IPIC 
pool of resale goods may not be combined with any other IPIC pool.
    The proposed regulations also provide that a wholesaler, retailer, 
jobber, or distributor using the IPIC pooling method under Sec.  1.472-
8(c)(2) that is also engaged, within the same trade or business, in 
manufacturing or processing activities may elect to establish dollar-
value pools for the resale goods accounted for using the IPIC method in 
accordance with Sec.  1.472-8(c)(2) (that is, based on the general 
expenditure categories in Table 3 of the CPI Detailed Report in the 
case of retailer or the 2-digit commodity codes in Table 9 of the PPI 
Detailed Report in the case of a wholesaler, retailer, jobber, or 
distributor). If the wholesaler, retailer, jobber, or distributor makes 
this election, it must also establish pools for its manufactured or 
processed goods based on the 2-digit commodity codes in Table 9 of the 
PPI Detailed Report.
    If the wholesaler, retailer, jobber, or distributor chooses to use 
the 5-percent method of pooling, resale IPIC pools of less than 5 
percent of the total value of inventory may be combined to form a 
single miscellaneous IPIC pool of resale goods. The wholesaler, 
retailer, jobber, or distributor may also combine the IPIC pools of 
manufactured or processed goods of less than 5 percent of the total 
value of inventory to form a single miscellaneous IPIC pool of 
manufactured or processed goods. If the resale miscellaneous IPIC pool 
is less than 5 percent of the total value of inventory, the wholesaler, 
retailer, jobber, or distributor may combine the resale miscellaneous 
IPIC pool with the largest resale IPIC pool. The miscellaneous IPIC 
pool of manufactured or processed goods may not be combined with any 
other IPIC pool.
    The Treasury Department and the IRS specifically request comments 
on the requirement that a taxpayer engaged in both manufacturing and 
resale activities within the same trade or business is required to use 
IPIC pooling for both activities.

Changes To Conform With Current BLS Publications

    These proposed regulations modify Sec.  1.472-8(b), (c), and (e)(3) 
to update references from Table 6 (Producer price indexes and percent 
changes for commodity groupings and individual items, not seasonally 
adjusted) to Table 9 (Producer price indexes and percent changes for 
commodity and service groupings and individual items, not seasonally 
adjusted) because of BLS changes in the PPI Detailed Report.
    These proposed regulations also modify Sec.  1.472-8(e)(3)(ii) to 
remove the exception to the trade or business requirement for taxpayers 
using the Department Store Inventory Price Indexes because BLS 
discontinued publishing these indexes after December 2013.

Effective/Applicability Date

    These regulations are proposed to apply for taxable years ending on 
or after the date the regulations are published as final regulations in 
the Federal Register.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It also has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and, because these regulations do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Internal Revenue Code, these proposed regulations will be submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on their impact on small business.

Comments and Request for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS request comments on all 
aspects of the proposed rules. All comments will be available at 
www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public

[[Page 85453]]

hearing will be published in the Federal Register.

Drafting Information

    The principal author of these regulations is Natasha M. Mulleneaux 
of the Office of the Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.472-8 also issued under 26 U.S.C 472. * * *
0
Par. 2. Section 1.472-8 is amended as follows:
0
1. Paragraph (b)(4) is revised.
0
2. Paragraph (c)(2) is revised.
0
3. Paragraph (e)(3)(ii) is revised.
0
4. Paragraph (e)(3)(iii)(B)(2) is amended by removing ``Table 6 
(Producer price indexes and percent changes for commodity groupings and 
individual items, not seasonally adjusted)'' and adding in its place 
``Table 9 (formerly Table 6) (Producer price indexes and percent 
changes for commodity and service groupings and individual items, not 
seasonally adjusted)'' in the first sentence; and removing ``Table 6'' 
and adding in its place ``Table 9'' in the second sentence.
0
5. Paragraphs (e)(3)(iii)(C)(1) and (2) are amended by removing ``Table 
6'' and adding in its place ``Table 9''.
0
6. Paragraph (e)(3)(v) is revised.
    The revisions read as follows:


Sec.  1.472-8  Dollar-value method of pricing LIFO inventories.

* * * * *
    (b) * * *
    (4) IPIC method pools--(i) In general. A manufacturer or processor 
that elects to use the inventory price index computation method 
described in paragraph (e)(3) of this section (IPIC method) for a trade 
or business may elect to establish dollar-value pools for those 
manufactured or processed items accounted for using the IPIC method as 
provided in this paragraph (b)(4)(i) based on the 2-digit commodity 
codes (that is, major commodity groups) in Table 9 (formerly Table 6) 
(Producer price indexes and percent changes for commodity and service 
groupings and individual items, not seasonally adjusted) of the ``PPI 
Detailed Report'' published monthly by the United States Bureau of 
Labor Statistics (available at http://www.bls.gov). A taxpayer electing 
to establish dollar-value pools under this paragraph (b)(4)(i) may 
combine IPIC pools of manufactured or processed goods that comprise 
less than 5 percent of the total current-year cost of all dollar-value 
pools for that trade or business to form a single miscellaneous 
manufactured or processed IPIC pool. A taxpayer electing to establish 
dollar-value pools under this paragraph (b)(4)(i) may combine a 
miscellaneous manufactured or processed IPIC pool that comprises less 
than 5 percent of the total current-year cost of all dollar-value pools 
with the largest manufactured or processed IPIC pool. Each of these 5-
percent rules is a method of accounting. A taxpayer may not change to, 
or cease using, either 5-percent rule without obtaining the 
Commissioner's prior consent. Whether a specific manufactured or 
processed IPIC pool or the miscellaneous manufactured or processed IPIC 
pool satisfies the applicable 5-percent rule must be determined in the 
year of adoption or year of change, whichever is applicable, and 
redetermined every third taxable year. Any change in pooling required 
or permitted as a result of a 5-percent rule is a change in method of 
accounting. A taxpayer must secure the consent of the Commissioner 
pursuant to Sec.  1.446-1(e) before combining or separating 
manufactured or processed IPIC pools and must combine or separate its 
manufactured or processed IPIC pools in accordance with paragraph 
(g)(2) of this section.
    (ii) Pooling of goods a manufacturer or processor purchased for 
resale. A manufacturer or processor electing to establish dollar-value 
pools under paragraph (b)(4)(i) of this section and that is also 
engaged, within the same trade or business, in wholesaling or retailing 
goods purchased from others (resale), must establish pools for its 
resale goods in accordance with paragraph (c)(2)(i) of this section. A 
manufacturer or processor that must establish dollar-value pools for 
resale goods under this paragraph (b)(4)(ii) may combine IPIC pools of 
resale goods that comprise less than 5 percent of the total current-
year cost of all dollar-value pools for that trade or business to form 
a single miscellaneous resale IPIC pool. The single miscellaneous 
resale IPIC pool established pursuant to this paragraph (b)(4)(ii) may 
not be combined with any other IPIC pool. This 5-percent rule is a 
method of accounting. A taxpayer may not change to, or cease using, 
this 5-percent rule without obtaining the Commissioner's prior consent. 
Whether a specific resale IPIC pool satisfies the 5-percent rule must 
be determined in the year of adoption or year of change, whichever is 
applicable, and redetermined every third taxable year. Any change in 
pooling required or permitted as a result of this 5-percent rule is a 
change in method of accounting. A taxpayer must secure the consent of 
the Commissioner pursuant to Sec.  1.446-1(e) before combining or 
separating resale IPIC pools and must combine or separate its resale 
IPIC pools in accordance with paragraph (g)(2) of this section.
    (iii) No commingling of manufactured goods and resale goods within 
a pool. Notwithstanding any other rule provided in paragraph (b) or (c) 
of this section, a manufacturer or processor electing to establish 
dollar-value pools under paragraph (b)(4)(i) of this section and that 
is also engaged in retailing or wholesaling may not include 
manufactured or processed goods in the same IPIC pool as goods 
purchased for resale. Further, in applying the 5-percent rules 
described in paragraphs (b)(4)(i) and (ii) of this section, a taxpayer 
may not combine an IPIC pool of manufactured or processed goods that 
comprises less than 5 percent of the total current-year cost of all 
dollar-value pools for that trade or business with a resale IPIC pool 
that comprises less than 5 percent of the total current-year cost of 
all dollar-value pools for the purpose of forming a single 
miscellaneous IPIC pool.
    (iv) Examples. The rules of paragraph (b)(4) of this section may be 
illustrated by the following examples:
    Example 1.  (i) Taxpayer is engaged in the trade or business of 
manufacturing products A, B, and C. In order to cover temporary 
shortages, Taxpayer also purchases a small quantity of identical 
products for resale to customers. Taxpayer treats its manufacturing 
and resale activities as a single trade or business. Taxpayer uses 
the IPIC method described in paragraph (e)(3) of this section. 
Pursuant to its election, Taxpayer establishes dollar-value pools 
for the manufactured items under paragraph (b)(4)(i) of this 
section, based on the 2-digit commodity codes in Table 9 of the PPI 
Detailed Report. Taxpayer also establishes dollar-value pools for 
the items purchased for resale under paragraph (b)(4)(ii) of this 
section, based on the 2-digit commodity codes in Table 9 of the PPI 
Detailed Report. Taxpayer does not choose to use the 5-percent rules 
under paragraphs (b)(4)(i) and (ii) of this section.
    (ii) Even though Taxpayer has manufactured items and resale 
items that share the same 2-digit commodity codes,

[[Page 85454]]

under paragraph (b)(4)(iii) of this section, Taxpayer's manufactured 
goods may not be included in the same IPIC pool as its goods 
purchased for resale.
    Example 2.  (i) The facts are the same as in Example 1, except 
Taxpayer establishes three IPIC pools for its manufacturing 
activities and three IPIC pools for its resale activities. Further, 
Taxpayer chooses to use the 5-percent rules of paragraphs (b)(4)(i) 
and (ii) of this section. The percentage of total current-year cost 
of each IPIC pool to the current-year cost of all dollar-value pools 
for the trade or business is as follows:

------------------------------------------------------------------------
                                                         Percentage of
                                                      total current-year
                                                       cost of IPIC pool
                                                        to current-year
                                                      cost of all dollar-
                                                        value pools (%)
------------------------------------------------------------------------
Manufacturing Pools:
    Pool A..........................................                  90
    Pool B..........................................                   1
    Pool C..........................................                   1
Resale Pools:
    Pool D..........................................                   6
    Pool E..........................................                   1
    Pool F..........................................                   1
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
                                                                     100
------------------------------------------------------------------------

    (ii) For purposes of applying the 5-percent rules to Taxpayer's 
manufacturing operations under paragraph (b)(4)(i) of this section, 
because Pools B and C each comprise less than 5 percent of the total 
current-year cost of all dollar-value pools, Pools B and C may be 
combined to form a single miscellaneous pool of manufactured or 
processed goods (new Pool G).
    (iii) For purposes of applying the 5-percent rules to Taxpayer's 
resale operations under paragraph (b)(4)(ii) of this section, 
because Pools E and F each comprise less than 5 percent of the total 
current-year cost of all dollar-value pools, Pools E and F may be 
combined to form a single miscellaneous pool of resale goods (new 
Pool H).
    (iv) Because Pool G comprises less than 5 percent of the total 
current-year cost of all dollar-value pools, under paragraph 
(b)(4)(i) of this section, Pool G may be combined with Pool A, the 
largest IPIC pool of manufactured goods.
    (v) Although Pool H also comprises less than 5 percent of the 
total current-year cost of all dollar-value pools, under paragraph 
(b)(4)(ii) of this section, Pool H may not be combined with Pool A, 
the largest pool of manufactured goods, or Pool D, the largest pool 
of resale goods.

* * * * *
    (c) * * *
    (2) IPIC method pools--(i) In general. A retailer that elects to 
use the inventory price index computation method described in paragraph 
(e)(3) of this section (IPIC method) for a trade or business may elect 
to establish dollar-value pools for those purchased items accounted for 
using the IPIC method as provided in this paragraph (c)(2)(i) based on 
either the general expenditure categories (that is, major groups) in 
Table 3 (Consumer Price Index for all Urban Consumers (CPI-U): U.S. 
city average, detailed expenditure categories) of the ``CPI Detailed 
Report'' or the 2-digit commodity codes (that is, major commodity 
groups) in Table 9 (formerly Table 6) (Producer price indexes and 
percent changes for commodity and service groupings and individual 
items, not seasonally adjusted) of the ``PPI Detailed Report.'' A 
wholesaler, jobber, or distributor that elects to use the IPIC method 
for a trade or business may elect to establish dollar-value pools for 
any group of resale goods accounted for using the IPIC method based on 
the 2-digit commodity codes (that is, major commodity groups) in Table 
9 (Producer price indexes and percent changes for commodity and service 
groupings and individual items, not seasonally adjusted) of the ``PPI 
Detailed Report.'' The ``CPI Detailed Report'' and the ``PPI Detailed 
Report'' are published monthly by the United States Bureau of Labor 
Statistics (BLS) (available at http://www.bls.gov). A taxpayer electing 
to establish dollar-value pools under this paragraph (c)(2)(i) may 
combine IPIC pools of resale goods that comprise less than 5 percent of 
the total current-year cost of all dollar-value pools for that trade or 
business to form a single miscellaneous resale IPIC pool. A taxpayer 
electing to establish pools under this paragraph (c)(2)(i) may combine 
a miscellaneous resale IPIC pool that comprises less than 5 percent of 
the total current-year cost of all dollar-value pools with the largest 
resale IPIC pool. Each of these 5-percent rules is a method of 
accounting. A taxpayer may not change to, or cease using, either 5-
percent rule without obtaining the Commissioner's prior consent. 
Whether a specific resale IPIC pool or the miscellaneous resale IPIC 
pool satisfies the applicable 5-percent rule must be determined in the 
year of adoption or year of change, whichever is applicable, and 
redetermined every third taxable year. Any change in pooling required 
or permitted under a 5-percent rule is a change in method of 
accounting. A taxpayer must secure the consent of the Commissioner 
pursuant to Sec.  1.446-1(e) before combining or separating resale IPIC 
pools and must combine or separate its resale IPIC pools in accordance 
with paragraph (g)(2) of this section.
    (ii) Pooling of manufactured or processed goods of a wholesaler, 
retailer, jobber, or distributor. A wholesaler, retailer, jobber, or 
distributor electing to establish dollar-value pools under paragraph 
(c)(2)(i) of this section and that is also engaged, within the same 
trade or business, in manufacturing or processing, must establish pools 
for its manufactured or processed goods in accordance with paragraph 
(b)(4)(i) of this section. A wholesaler, retailer, jobber, or 
distributor that must establish dollar-value pools for manufactured or 
processed goods under this paragraph (c)(2)(ii) may combine IPIC pools 
of manufactured or processed goods that comprise less than 5 percent of 
the total current-year cost of all dollar-value pools for that trade or 
business to form a single miscellaneous manufactured or processed IPIC 
pool. The single miscellaneous manufactured or processed IPIC pool 
established pursuant to this paragraph (c)(2)(ii) may not be combined 
with any other IPIC pool. This 5-percent rule is a method of 
accounting. A taxpayer may not change to, or cease using, this 5-
percent rule without obtaining the Commissioner's prior consent. 
Whether a specific manufactured or processed IPIC pool satisfies the 5-
percent rule must be determined in the year of adoption or year of 
change, whichever is applicable, and redetermined every third taxable 
year. Any change in pooling required or permitted as a result of a 5-
percent rule is a change in method of accounting. A taxpayer must 
secure the consent of the Commissioner pursuant to Sec.  1.446-1(e) 
before combining or separating manufactured or processed IPIC pools and 
must combine or separate its manufactured or processed IPIC pools in 
accordance with paragraph (g)(2) of this section.
    (iii) No commingling of manufactured goods and purchased goods 
within a pool. Notwithstanding any other rule provided in paragraph (b) 
or (c) of this section, a wholesaler, retailer, jobber, or distributor 
electing to establish dollar-value pools under paragraph (c)(2)(i) of 
this section and that is also engaged in manufacturing or processing 
may not include manufactured or processed goods in the same IPIC pool 
as goods purchased for resale. Further, in applying the 5-percent rules 
described in paragraphs (c)(2)(i) and (ii) of this section, a taxpayer 
may not combine an IPIC pool of manufactured or processed goods that 
comprises less than 5 percent of the total current-year cost of all 
dollar-value pools with a resale IPIC pool that comprises less than 5 
percent of the total current-year cost of all dollar-value pools for 
purposes of forming a single miscellaneous IPIC pool.
    (iv) Examples. The rules of paragraph (c)(2) of this section may be 
illustrated by the following examples:


[[Page 85455]]


    Example 1. (i) Taxpayer is engaged in the trade or business of 
wholesaling products A, B, and C. Taxpayer also manufactures a small 
quantity of identical products for sale to customers. Taxpayer 
treats its wholesaling and manufacturing activities as a single 
trade or business. Taxpayer uses the IPIC method described in 
paragraph (e)(3) of this section. Pursuant to its election, Taxpayer 
establishes dollar-value pools for the wholesale items purchased for 
resale under paragraph (c)(2)(i) of this section, based on the 2-
digit commodity codes in Table 9 of the PPI Detailed Report. 
Taxpayer also establishes dollar-value pools for the manufactured 
items under paragraph (c)(2)(ii) of this section, based on the 2-
digit commodity codes in Table 9 of the PPI Detailed Report. 
Taxpayer does not choose to use the 5-percent rules under paragraphs 
(c)(2)(i) and (ii) of this section.
    (ii) Even though Taxpayer has resale and manufactured items that 
share the same 2-digit commodity codes, under paragraph (c)(2)(iii) 
of this section, Taxpayer's resale goods may not be included in the 
same IPIC pool as its manufactured goods.
    Example 2.(i) The facts are the same as in Example 1, except 
Taxpayer establishes three IPIC pools for its wholesale activities 
and three IPIC pools for its manufacturing activities. Further, 
Taxpayer chooses to use the 5-percent rules of paragraphs (c)(2)(i) 
and (ii) of this section. The percentage of total current-year cost 
of each IPIC pool to the current-year cost of all dollar-value pools 
for the trade or business is as follows:

------------------------------------------------------------------------
                                                         Percentage of
                                                      total current-year
                                                       cost of IPIC pool
                                                        to current-year
                                                      cost of all dollar-
                                                        value pools (%)
------------------------------------------------------------------------
Wholesaling Pools:
    Pool J..........................................                  90
    Pool K..........................................                   1
    Pool L..........................................                   1
Manufacturing Pools:
    Pool M..........................................                   6
    Pool N..........................................                   1
    Pool O..........................................                   1
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
                                                                     100
------------------------------------------------------------------------

    (ii) For purposes of applying the 5-percent rules to Taxpayer's 
wholesaling operations under paragraph (c)(2)(i) of this section, 
because Pools K and Pool L each comprise less than 5 percent of the 
total current-year cost of all dollar-value pools, Pools K and L may 
be combined to form a single miscellaneous pool of wholesale goods 
(new Pool P).
    (iii) For purposes of applying the 5-percent rules to Taxpayer's 
manufacturing operations under paragraph (c)(2)(ii) of this section, 
because Pools N and O each comprise less than 5 percent of the total 
current-year cost of all dollar-value pools, Pools N and O may be 
combined to form a single miscellaneous pool of manufactured goods 
(new Pool Q).
    (iv) Because Pool P comprises less than 5 percent of the total 
current-year cost of all dollar-value pools, under paragraph 
(c)(2)(i) of this section, Pool P may be combined with Pool J, the 
largest IPIC pool of resale goods.
    (v) Although Pool Q also comprises less than 5 percent of the 
total current-year cost of all dollar-value pools, under paragraph 
(c)(2)(ii) of this section, Pool Q may not be combined with Pool J, 
the largest pool of resale goods, or Pool M, the largest pool of 
manufactured goods.
* * * * *
    (e) * * *
    (3) * * *
    (ii) Eligibility. Any taxpayer electing to use the dollar-value 
LIFO method may elect to use the IPIC method. Except as provided in 
other published guidance, a taxpayer that elects to use the IPIC method 
for a specific trade or business must use that method to account for 
all items of dollar-value LIFO inventory.
* * * * *
    (v) Effective/applicability date. The rules of this paragraph 
(e)(3) and paragraphs (b)(4) and (c)(2) of this section are applicable 
for taxable years ending on or after the date the Treasury decision 
adopting these rules as final regulations is published in the Federal 
Register.
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-28375 Filed 11-25-16; 8:45 am]
 BILLING CODE 4830-01-P