[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1374-7]

[Page 772-773]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1374-7  Inventory.

    (a) Valuation. The fair market value of the inventory of an S 
corporation on the first day of the recognition period equals the amount 
that a willing buyer would pay a willing seller for the inventory in a 
purchase of all the S corporation's assets by a buyer that expects to 
continue to operate the S corporation's business. For purposes of the 
preceding sentence, the buyer and seller are presumed not to be under 
any compulsion to buy or sell and to have reasonable knowledge of all 
relevant facts.
    (b) Identity of dispositions. The inventory method used by an S 
corporation for tax purposes must be used to identify whether the 
inventory it disposes of during the recognition period is inventory it 
held on the first day of that period. Thus, a corporation using the LIFO 
method does not dispose of inventory it held on the first day of the 
recognition period unless the carrying value of its inventory for a 
taxable year during that period is less than the carrying value of its 
inventory on the first day of the recognition period (determined using 
the LIFO method as described in section 472). However, if a corporation 
changes its method of accounting for inventory (for example, from the 
FIFO method to the LIFO method or from the LIFO method to

[[Page 773]]

the FIFO method) with a principal purpose of avoiding the tax imposed 
under section 1374, it must use its former method to identify its 
dispositions of inventory.

[T.D. 8579, 59 FR 66469, Dec. 27, 1994]