inventories in certain industries) is amended to read as follows: "(d) If the inventory method described in section 22 (d) (1), as amended, of the Internal Revenue Code is used for the first taxable year beginning after December 31, 1938, then, in determining income for the preceding taxable year, the closing inventory of such year of the goods specified in the application under section 22 (d) (2), as amended, of such Code shall be at cost." The § 9.22 (d)-1 Inventories of tanners, and producers and processors of certain nonferrous metals-(a) Elective method. general rule is that goods taken in the inventory which have been so intermingled that they cannot be identified with specific invoices will be deemed to be the goods most recently acquired which cannot be so identified. An exception to this general rule is provided for in section 22 (d), which permits certain specifically described taxpayers to elect to treat certain raw materials remaining on hand at the close of the taxable year as being: first, those included in the inventory as of the beginning of the taxable year (in the order of acquisition) to the extent thereof, and second, those acquired in the taxable year, in the order of acquisition. No item in an inventory of raw materials to which this method is applied shall be valued at market. All inventories of such raw materials (including the inventory as of the close of the preceding taxable year) shall be taken at cost. The opening inventory of such raw materials for the taxable year for which an election is made shall be brought in at the same cost as the closing inventory of such raw materials for the preceding taxable year. Corporation elects to use the method provided for in section 22 (d), it shall use such method in taking inventory of (1) all raw materials used in refining non-ferrous metals and (2) all other raw materials which are of a kind used in producing copper products, not further advanced than rods, sheets, tubes, bars, plates, or strips, and which are used by it in producing copper products, even though the copper products produced by it further advanced than rods, sheets, tubes, bars, plates, or strips. In the case of a taxpayer whose principal business is tanning hides or skins, or both, such method shall be applied only in taking inventory of raw materials used in the business of tanning hides, or skins, or both. are The method provided for in section 22 (d) is to be applied only to raw materials which are so intermingled that they cannot be identified with specific invoices. There is a further restriction that the method provided for in section 22 (d) shall be applied only to raw materials not yet included in goods in process or finished goods, but this restriction does not apply in the case of a taxpayer whose principal business is tanning hides or skins, or both. Each taxpayer to whom these restrictions are applicable shall maintain such accounting records as will enable him to comply with such restrictions. If the taxpayer's principal business is tanning hides or skins, or both, the method provided for in section 22 (d), if elected by the taxpayer, shall be applied to all raw materials (including those included in goods in process and in finished goods) used in the business of tanning hides or skins, or both, if such raw materials are so intermingled that they cannot be identified with specific invoices.*† A taxpayer shall be entitled to elect to have [Preceding section, in small type, supersuch method applied in taking his inventory seded by following section during period covas of the close of any taxable year beginning ered by this Supplement with respect to taxafter December 31, 1938, if his principal busi-able years governed by the Internal Revenue ness at the beginning of such taxable year Code] (as shown by all transactions during the preceding taxable year and any other facts and circumstances relevant to the determination | of the principal business) is— (1) Smelting non-ferrous ores or concentrates, or refining non-ferrous metals, or both; (2) 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; or (3) Tanning hides or skins, or both. (b) Restrictions upon use of method. Except in the case of a taxpayer whose principal business is tanning hides or skins, or both, if a taxpayer elects to have the method provided for in section 22 (d) applied, such method shall be applied in taking inventory of all raw materials used in (1) smelting non-ferrous ores or concentrates, or refining non-ferrous metals, or both, or (2) producing brass, copper products, or brass products, or any one or more of them, not further ad vanced than rods, sheets, tubes, bars, plates. § 9.22 (d)-1 Inventories under elective method. Any taxpayer permitted or required to take inventories pursuant to the provisions of section 22 (c) of the Internal Revenue Code, and pursuant to the provisions of §§ 9.22 (c)-1 to 9.22 (c)-8, may elect with respect to those goods specified in his application and properly subject to inventory to compute his opening and closing inventories in accordance with the method provided by section 22 (d) of the Code as amended by section 219 of the Revenue Act of 1939. Under this elective inventory method, the taxpayer is permitted to treat those goods remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the taxable year, in the order of acquisition and to the extent thereof, and or strips; and it shall be applied only in tak- Second, those acquired during the This elective inventory method is not in excess of what were on hand as of dependent upon the character of the business in which the taxpayer is engaged, or upon the identity or want of identity through commingling of any of the goods on hand, and may be adopted by the taxpayer as of the close of any taxable year beginning after December 31, 1938. If the elective inventory method is used by a taxpayer who regularly and consistently, in a manner similar to hedging on a futures market, matches purchases with sales, then firm purchase and sales contracts (i. e., those not legally subject to cancellation by either party) entered into at fixed prices on or before the date of the inventory may be included in purchases or sales, as the case may be, for the purpose of determining the cost of goods sold and the resulting profit or loss, provided that this practice is regularly and consistently adhered to by the taxpayer and that, in the opinion of the Commissioner, income is clearly reflected thereby.† (I.R.C. 62, 53 Stat. 32; 26 U.S.C., Sup., 62) [As amended by T.D. 4959, Dec. 28, 1939, 4 F.R. 5001] the beginning of the taxable year shall be included in the closing inventory, regardless of identification with specific invoices, at costs determined as follows: (i) By reference to the actual cost of the goods most recently purchased or produced; (ii) By reference to the actual cost of the goods purchased or produced during the taxable year in the order of acquisition; (iii) By application of an average unit cost equal to the aggregate cost of all of the goods purchased or produced throughout the taxable year divided by the total number of units so purchased or produced, the goods reflected in such inventory increase being considered for the purposes of section 22 (d) as having been acquired all at the same time; or (iv) Pursuant to any other proper method which, in the opinion of the Commissioner, clearly reflects income. Whichever of the several methods of valuing the inventory increase is adopted by the taxpayer and approved by the Commissioner in accordance with the § 9.22 (d)-2 Requirements incident to regulations in this part shall be consistadoption and use of elective method. ently adhered to in all subsequent taxable The adoption and use of the elective in-years so long as the elective inventory ventory method is, by statute and by method is used by the taxpayer; the regulations in this part, made subject to the following requirements: (1) The taxpayer shall file pursuant to the regulations in this part an application to use such method specifying with particularity the goods to which it is to be applied; (2) The inventory shall be taken`at cost regardless of market values; (3) Goods of the specified type inIcluded in the opening inventory of the taxable year for which the method is first used shall be considered as having been acquired at the same time and at a unit cost equal to the actual cost of the aggregate divided by the number of units on hand, such actual cost of the aggregate being determined pursuant to the inventory method employed by the taxpayer under the regulations applicable to the preceding taxable year; Example 1. Suppose that the taxpayer adopts the elective inventory method for the taxable year 1939 with an opening inventory of 10 units at 10 cents per unit, that it makes 1939 purchases of 10 units as follows: (4) Goods of the specified type on hand as of the close of the taxable year or For source citation, see note to § 9.1-1. - 100 56 13 169 value in lieu of cost not being considered at variance with this requirement; (6) Goods of the specified type on hand as of the close of the taxable year preceding the taxable year for which this inventory method is first used, whether such preceding taxable year began before or after December 31, 1938, shall be included in the taxpayer's inventory for such preceding taxable year at cost; (7) The elective inventory method once adopted by the taxpayer with the approval of the Commissioner, shall be adhered to in all subsequent taxable years unless (i) A change to a different method is approved by the Commissioner; or (ii) The Commissioner determines that the taxpayer has used in ascertaining income, profit, or loss, for credit purposes, or for the purpose of reports to shareholders, partners, or other proprie (i) In case the increase was taken as tors, or to beneficiaries, and for years most recent purchases subsequent to his adoption of the elective inventory method, an inventory method at variance with that referred to in § 9.22 (d)-1 and requires of the taxpayer a change to a different method for such subsequent taxable year or any taxable year thereafter; (8) The taxpayer shall maintain such accounting records as will enable the Commissioner readily to verify the taxpayer's inventory computations as well as his compliance with these several requirements. (I.R.C. 62, 53 Stat. 32; 26 U.S.C., Sup., 62) [Art. 22 (d)−2, Regs. 101, as added by T.D. 4959, Dec. 28, 1939; (iii) In case increase was taken on 4 F.R. 5001] basis of an average 10 @ 10 (from 1938) 100 3 @ 13 (from 1939) 39 -- Totals: 13 139 NOTE: The above section is applicable only to taxable years governed by the Internal Revenue Code. § 9.22 (d)-3 Time and manner of making election. The method of taking inventory provided for in section 22 (d) shall not be filing of his return for the taxable year preapplied, unless the taxpayer at or before the ceding the taxable year as of the close of which the method is first to be applied, has have it applied. Such election shall be made under oath or affirmation on Form 970 in triplicate in accordance with the instructions filled with the Commissioner his election to (5) The taxpayer shall establish to the satisfaction of the Commissioner that the taxpayer has not, in the taxable year for which the elective inventory method is first used or in any subsequent taxable year, used in determining income, profit, or loss, for credit purposes, or for the purpose of reports to share-printed thereon and with these regulations holders, partners, or other proprietors, or to beneficiaries, any inventory method other than that referred to in § 9.22 (d)-1, or at variance with the requirement referred to in paragraph (3) of this section, the taxpayer's use of market and shall be accompanied by a complete statement of all facts pertaining to the taxpayer's right to make such election, including (1) A description of each business carried preceding the taxable year as of the close of on by the taxpayer during the taxable year which the method provided for in section 22 (d) is first to be applied, together with a description of the functions and operations performed by each department of each such business. (2) A statement describing any changes made, during the preceding taxable year, in the nature of the business or businesses carried on by the taxpayer. (3) A balance sheet as of the beginning of the taxable year as of the close of which such method is first to be applied, and a balance sheet as of the beginning of the preceding taxable year. (4) An analysis of all inventories as of the beginning of the taxable year as of the close of which such method is first to be applied, and of all inventories as of the beginning of the preceding taxable year. Such analysis shall include a description and the amount of each kind of raw materials. In the case of a taxpayer who claims that his principal business is 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, the analysis of finished goods shall show the amount of each product of a given style, shape, or use. In the case of any other taxpayer, the analysis of finished goods shall show one of the following: (1) The cost of each group of products going through the same processes in the factory; (ii) the cost of each group of products requiring the same kind of raw materials; or (iii) the cost of each group of products having the same style, shape, or use. Each group of products shall be clearly described. (5) An analysis of all sales made during the taxable year preceding the taxable year as of the close of which such method is first to be applied. In the case of a taxpayer who claims that his principal business is 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, such analysis shall show the sales of each product of a given style, shape, or use. In the case of any other taxpayer, such analysis shall show one of the following: (1) The sales of each group of products going through the same processes in the factory; (1) the sales of each group of products requiring the same kind of raw materials; or (iii) the sales of each group of products of a given style, shape, or use. Each group of products shall be clearly described. (6) A profit and loss statement for the taxable year preceding the taxable year as of the close of which such method is first to be applied, including therein all items of taxexempt income.* [Art. 22 (d)-2, Regs. 101, Feb. 7, 1939; 4 F.R. 638] [Preceding section, in small type, superseded by following section during period covered by this Supplement with respect to taxable years governed by the Internal Revenue Code] § 9.22 (d)-3 Time and manner of making election. The elective inventory method may be adopted and used only if the taxpayer files with his return for the taxable year as of the close of which the method is first to be used (or, if such return is filed prior to the ninetieth day after the approval of the regulations in this part, then at any time prior to the expiration of such ninetieth day), in triplicate on Form 970 (revised), and pursuant to the instructions printed thereon and to the requirements of the regulations in this part, a statement of his election to use such inventory method. Such statement shall be accompanied by an analysis of all inventories of the taxpayer as of the beginning and as of the end of the taxable year for which the elective method is proposed first to be used, and also as of the beginning of the preceding taxable year. In the case of a manufacturer, this analysis shall show in detail the manner in which costs are computed with respect to raw materials, goods in process, and finished goods, segregating the products (whether in process or finished goods) into natural groups on the basis of either (1) similarity in factory processes through which they pass, or (2) similarity of raw materials used, or (3) similarity in style, shape, or use of finished products. Each group of products shall be clearly described. The taxpayer shall submit for the consideration of the Commissioner in connection with the taxpayer's adoption or use of the elective inventory method such other detailed information with respect to his business or accounting system as may be at any time requested by the Commissioner. As a condition to the taxpayer's use of the elective inventory method, the Commissioner may require that the method be used with respect to goods other than those specified in the taxpayer's statement of election if, in the opinion of the Commissioner, the use of such method with respect to such other goods is essential to a clear reflection of income. Whether or not the taxpayer's application for the adoption and use of the elective inventory method should be approved, and whether or not such method, once adopted, may be continued, and the propriety of all computations incidental to the use of such method will be determined by the Commissioner in connection with the examination of the taxpayer's returns. (I.R.C. 62, 53 Stat. 32; 26 U.S.C., Sup., 62) [As amended by T.D. 4959, Dec. 28, 1939; 4 F.R. 5002] § 9.22 (d)-4 Adjustments to be made by taxpayer. A taxpayer may not change to the method of taking inventories provided for in section 22 (d) unless he agrees to and makes such adjustments, and pays such taxes with respect to such adjustments, in the inventories of prior taxable years or otherwise, as the Commissioner deems necessary to prevent the change in method from resulting in avoidance of tax. See section 22 (d) (6).* [Art. 22 (d)-3, Regs. 101, Feb. 7, 1939; 4 FR. 638] [Preceding section, in small type, superseded by following section during period covered by this Supplement with respect to taxable years governed by the Internal Revenue Code] § 9.22 (d)-4 Adjustments to be made by taxpayer. A taxpayer may not change to the elective method of taking inventories unless, at the time he files his application for the adoption of such method, he agrees to such adjustments incident to the change to or from such method, or incident to the use of such method, in the inventories of prior taxable years or otherwise, as the Commissioner upon the examination of the taxpayer's returns may deem necessary in order that the true income of the taxpayer will be clearly reflected for the years involved. (I.R.C. 62, 53 Stat. 32; 26 U.S.C., Sup., 62) [As amended by T.D. 4959, Dec. 28, 1939; 4 F.R. 50021 An § 9.22 (d)-5 Revocation of election. election made under section 22 (d) is irrevo cable and the method so elected shall be applied in all subsequent taxable years in taking inventory of raw materials used in the business to which such method is applicable under the election, notwithstanding any change in the principal business of the taxpayer, unless another method be authorized by the Commissioner pursuant to a written application therefor filed with him. Application for permission to change the method of taking inventory after an election has been made under section 22 (d) shall be filed within 90 days after the beginning of the first taxable year for which such change is to be effective. The permission to make the change will not be granted unless the taxpayer and the Commissioner agree to the terms and conditions under which the change will be effected.* [Art. 22 (d)-4, Regs. 101, Feb. 7, 1939; 4 F.R. 638] [Preceding section, in small type, superseded by following section during period covered by this Supplement with respect to taxable years governed by the Internal Revenue Code] § 9.22 (d)-5 Revocation of election. An election made to adopt and use the elective inventory method is irrevocable, and the method once adopted shall be used in all subsequent taxable years, unless the use of another method be re quired by the Commissioner, or authorized by him pursuant to a written application therefor filed with him as provided in § 9.41-2. (I.R.C. 62, 53 Stat. 32; 26 U.S.C., Sup., 62) [As amended by T.D. 4959, Dec. 28, 1939; 4 F.R. 5003] § 9.22 (d)-6 Change from elective inventory method. If the taxpayer is granted permission by the Commissioner to discontinue the use of the elective method of taking inventories, and thereafter to pursue some other method, or if the taxpayer is required by the Commissioner to discontinue the use of the elective method by reason of the taxpayer's failure to conform to the requirements detailed in § 9.22 (d)-2, the inventory of the specified goods for the first taxable year affected by the change and for each taxable year thereafter shall be taken (a) In conformity with the method used by the taxpayer under section 22 (c) in inventorying goods not included in his elective inventory computations; or (b) If the elective inventory method was used by the taxpayer with respect to all of his goods subject to inventory, then in conformity with the inventory method used by the taxpayer prior to his adoption of the elective inventory method; or (c) If the taxpayer had not used inventories prior to his adoption of the elective inventory method and had no goods currently subject to inventory by a method other than the elective method, then in conformity with such inventory method as may be selected by the taxpayer and approved by the Commissioner as resulting in a clear reflection of income; or (d) In any event, in conformity with any inventory method to which the taxpayer may change pursuant to application approved by the Commissioner. (I.R.C. 62, 53 Stat. 32; 26 U.S.C., Sup., 62) [Art. 22 (d)-6, Regs. 101, as added by T.D. 4959, Dec. 28, 1939; 4 F.R. 50031 [SEC. 22. Gross income.] (e) Distributions by corporations.-Distributions by corporations shall be taxable to the shareholders as provided in section 115. (f) Determination of gain or loss.-In the case of a sale or other disposition of property, the gain or loss shall be computed as pro vided in section 111. (g) Gross income from sources within and without United States.-For computation of |