invoice price should be added transpor- Where no open market exists or where tation or other necessary charges incurred in acquiring possession of the goods.

(3) In the case of merchandise produced by the taxpayer since the beginning of the taxable year, (i) the cost of raw materials and supplies entering into or consumed in connection with the product, (ii) expenditures for direct labor, (iii) indirect expenses incident to and necessary for the production of the particular article, including in such indirect expenses a reasonable proportion of management expenses, but not including any cost of selling or return on capital, whether by way of interest or profit.

quotations are nominal, due to stagnant market conditions, the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available, such as specific purchases or sales by the taxpayer or others in reasonable volume and made in good faith, or compensation paid for cancellation of contracts for purchase commitments. Where the taxpayer in the regular course of business has offered for sale such merchandise at prices lower than the current price as above defined, the inventory may be valued at such prices less direct cost of disposition, and the correctness of such prices will be determined by reference to the actual sales of the taxpayer for a reasonable period before and after the date of the in

from the actual prices so ascertained will not be accepted as reflecting the

market.

(4) In any industry in which the usual rules for computation of cost of production are inapplicable, costs may be approximated upon such basis as may be reasonable and in conformity with estab-ventory. Prices which vary materially lished trade practice in the particular industry. Among such cases are (i) farmers and raisers of live stock (see § 9.22 (c)-6), (ii) miners and manufacturers who by a single process or uniform series of processes derive a product of two or more kinds, sizes, or grades, the unit cost of which is substantially alike (see § 9.22 (c)-7), and (iii) retail merchants who use what is known as the "retail method" in ascertaining approximate cost (see § 9.22 (c)-8).*†

§ 9.22 (c)-4 Inventories at cost or market, whichever is lower. Under ordinary circumstances and for normal goods in an inventory, "market" means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which usually purchased by the taxpayer, and is applicable in the cases

Where the inventory is valued upon the basis of cost or market, whichever is lower, the market value of each article on hand at the inventory date shall be compared with the cost of the article, and the lower of such values shall be taken as the inventory value of the article. *†

§ 9.22 (c)-5 Inventories by dealers in securities. A dealer in securities who in his books of account regularly inventories unsold securities on hand either(a) At cost;

(b) At cost or market, whichever is lower; or

(c) At market value,

may make his return upon the basis upon which his accounts are kept; pro

(a) of goods purchased and on hand, vided that a description of the method

and

(b) of basic elements of cost (materials, labor, and burden) in goods in process of manufacture and in finished goods on hand; exclusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts (i. e., those not legally subject to cancellation by either party) at fixed prices entered into before the date of the inventory, under which the taxpayer is protected against actual loss, which goods must be inventoried at cost.

employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another method be authorized by the Commissioner pursuant to a written application therefor filed with the Commissioner as provided in § 9.41-2. A dealer in securities in whose books of account separate computations of the gain or loss from the sale of the various lots of securities sold are made on the basis of the cost of each lot

(2) No adjustment sheets will be required, but the net income for the taxable year in which the change is made must be computed without deducting from the sum of the closing inventory and the sales and other receipts, the inventory of live stock, crops, and products at the beginning of the year; Provided, however—

shall be regarded, for the purposes of this, reflect income, adjustments for earlier section, as regularly inventorying his se- years may be accepted or required. If curities at cost. For the purpose of this it is impossible to render complete invenrule a dealer in securities is a merchant tories for the preceding year or years, the of securities, whether an individual, part- Commissioner will accept estimates nership, or corporation, with an estab- which, in his opinion, substantially relished place of business, regularly en- flect the income on the inventory basis gaged in the purchase of securities and for such preceding year or years; but their resale to customers; that is, one inventories must not include real estate, who as a merchant buys securities and buildings, permanent improvements, or sells them to customers with a view to any other assets subject to depreciation. the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, irrespective of whether such buying or selling constitutes the carrying on of a trade or business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.*i § 9.22 (c)-6 Inventories of live stock raisers and other farmers. Farmers may change the basis of their returns from that of receipts and disbursements to that of an inventory basis provided adjustments are made in accordance with one of the two methods outlined in (1) and (2) below. It is optional with the taxpayer which method is used, but, having elected one method, the option so exercised will be binding upon the taxpayer, and he will be precluded from filing amended returns upon the basis of the other method.

(i) That if any live stock, grain, or other property on hand at the beginning of the taxable year has been purchased and the cost thereof not charged to expense, only the difference between the cost and the selling price should be reported as income for the year in which sold;

(ii) But if the cost of such property has been charged to expense for a previous year, the entire amount received must be reported as income for the year in which sold.

Because of the difficulty of ascertaining actual cost of live stock and other farm products, farmers who render their returns upon an inventory basis may value their inventories according to the "farm-price method," which provides for the valuation of inventories at market price less direct cost of disposition. If the use of the "farm-price method" of valuing inventories for any taxable year involves a change in method of valuing inventories from that employed in prior years, permission for such change shall first be secured from the Commissioner as provided in § 9.41-2. In such case the opening inventory for the tax

(1) Opening and closing inventories shall be used for the year in which the change is made. There should be included in the opening inventory all farm products (including live stock) purchased or raised which were on hand at the date of the inventory, and there must be submitted with the return for the current taxable year an adjustment sheet for the preceding taxable year based on the in-able year in which the change is made ventory method, upon the amount of which adjustment the tax shall be assessed and paid (if any be due) at the rate of tax in effect for that year. Ordinarily an adjustment sheet for the pre-in which the change is made results in ceding year will be sufficient, but if, in an abnormally large income for that year, the opinion of the Commissioner, such there may be submitted with the return adjustment is not sufficient clearly to for such taxable year an adjustment

should be brought in at the same value as the closing inventory for the preceding taxable year. If such valuation of the opening inventory for the taxable year

statement for the preceding year. This § 9.22 (c)-8 Inventories of retail merstatement shall be based on the "farm- chants. Retail merchants who employ price method" of valuing inventories, what is known as the "retail method" upon the amount of which adjustments of pricing inventories may make their the tax, if any be due, shall be assessed returns upon that basis, provided (1) and paid at the rate of tax in effect for that the use of such method is desigsuch preceding year. If an adjustment nated upon the return, (2) that accurate for the preceding year is not, in the accounts are kept, and (3) that such opinion of the Commissioner, sufficient method is consistently adhered to unless clearly to reflect income, adjustment a change is authorized by the Commissheets for prior years may be accepted sioner as provided in § 9.41-2. Under or required. this method the total of the retail selling prices of the goods on hand at the end of the year in each department or of each class of goods is reduced to approximate cost by deducting therefrom

If returns have been made in which the taxable net income has been computed upon incomplete inventories, the abnormality should be corrected by submitting with the return for the current taxable year a statement for the preceding year. In this statement such adjustments shall be made as are necessary to bring the closing inventory for the preceding year into argeement with the opening complete inventory for the current taxable year. If necessary clearly to reflect income, similar adjustments may be made as at the beginning of the preceding year or years, and the tax, if any be due, shall be assessed and paid at the rate of tax in effect for such year or years.*†

an amount which bears the same ratio to such total as

(a) the total of the retail selling prices of goods included in the opening inventory plus the retail selling prices of the goods purchased during the year, with proper adjustment to such selling prices for all mark-ups and mark-downs, less

(b) the cost of the goods included in the opening inventory plus the cost of the goods purchased during the year, bears to (a).

A taxpayer maintaining more than one department in his store or dealing in classes of goods carrying different percentages of gross profit should not use a percentage of profit based upon an average of his entire business, but should compute and use in valuing his inventory the proper percentages for the respective departments or classes of goods.*†

This amount should represent as accurately as may be the amounts added § 9.22 (c)-7 Inventories of miners and to the cost price of the goods to cover manufacturers. A taxpayer engaged in selling and other expenses of doing busimining or manufacturing who by a singleness and for the margin of profit. process or uniform series of processes derives a product of two or more kinds, sizes, or grades, the unit cost of which is substantially alike, and who in conformity to a recognized trade practice allocates an amount of cost to each kind, size, or grade of product, which in the aggregate will absorb the total cost of production, may, with the consent of the Commissioner, use such allocated cost as a basis for pricing inventories, provided such allocation bears a reasonable relation to the respective selling values of the different kinds of product. See section 22 (d) as to inventories under elective method.*† [As amended by T.D. 4959, Dec. 28, 1939; 4 F.R. 5001]

NOTE: The last sentence of this section was amended by substituting the words "under elective method" for the words "of producers and processors of certain non-ferrous metals and of tanners," by T.D. 4959, Dec. 28, 1939; 4 F. R. 5001, which amendment is applicable only to taxable years governed by the Internal Revenue Code.

[SEC. 22. Gross income.]—

(d) Inventories in certain industries.(1) Producers and processors of certain nonferrous metals.-A taxpayer shall be entitled to elect the method of taking inventories provided in paragraph (2) if his principal business is—

(A) Smelting non-ferrous ores or concentrates, or refining non-ferrous metals, or both; or

(B) Producing brass, copper products, or brass products, or any one or more of them, not further advanced than rods, sheets, tubes, bars, plates, or strips.

(2) Inventories of raw materials.-A taxpayer entitled to elect, and who has SO elected, shall, in taking his inventory as of

the close of any taxable year beginning after | extent thereof, and second, those acquired in December 31, 1938, of raw materials which the taxable year; and

(A) used in a business described in par- inventory of the taxable year in which such method is first used as having been acquired agraph (1); and at the same time and determine their cost by the average cost method.

(6) Regulations as to change.-The change to such method shall be made in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary to prevent the avoidable years unlessance of tax.

(7) Change to different method.-An election made under this subsection shall be irrevocable and the method so elected shall be applied in all subsequent taxable years notwithstanding any change in the principal business of the taxpayer, unless with the approval of the Commissioner change to a different method is authorized, and then upon such terms and conditions and in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe.

SECTION 219 OF THE REVENUE ACT OF 1939