[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.471-8]

[Page 502-503]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.471-8  Inventories of retail merchants.

    (a) Retail merchants who employ what is known as the ``retail 
method'' of pricing inventories may make their returns upon that method, 
provided that the use of such method is designated upon the return, that 
accurate accounts are kept, and that such method is consistently adhered 
to unless a change is authorized by the Commissioner as provided in 
paragraph (e) of Sec. 1.446-1. Under the retail 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

[[Page 503]]

by deducting therefrom an amount which bears the same ratio to such 
total as--
    (1) The total of the retail selling prices of the 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
    (2) The cost of the goods included in the opening inventory plus the 
cost of the goods purchased during the year, bears to (1).

The result should represent as accurately as may be the amounts added to 
the cost price of the goods to cover selling and other expenses of doing 
business and for the margin of profit. See Sec. Sec. 1.263A-1 and 
1.263A-3 for rules regarding the computation of costs with respect to 
property acquired for resale.
    (b) For further adjustments to be made in the case of a retail 
merchant using the last-in, first-out inventory method authorized by 
section 472, see paragraph (k) of Sec. 1.472-1.
    (c) 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.
    (d) A taxpayer (other than one using the last-in, first-out 
inventory method) who previously has determined inventories in 
accordance with the retail method, except that, to obtain a basis of 
approximate cost or market, whichever is lower, has consistently and 
uniformly followed the practice of adjusting the retail selling prices 
of the goods included in the opening inventory and purchased during the 
taxable year for mark-ups but not for mark-downs, may continue such 
practice subject to the conditions prescribed in this section. The 
adjustments must be bona fide and consistent and uniform. Where mark-
downs are not included in the adjustments, mark-ups made to cancel or 
correct mark-downs shall not be included; and the mark-ups included must 
be reduced by the mark-downs made to cancel or correct such mark-ups.
    (e) In no event shall mark-downs not based on actual reduction of 
retail sale prices, such as mark-downs based on depreciation and 
obsolescence, be recognized in determining the retail selling prices of 
the goods on hand at the end of the taxable year.
    (f) A taxpayer (other than one using the last-in, first-out 
inventory method) who previously has determined inventories without 
following the practice of eliminating mark-downs in making adjustments 
to retail selling prices may adopt such practice, provided permission to 
do so is obtained in accordance with, and subject to the terms provided 
by, paragraph (e) of Sec. 1.446-1. A taxpayer filing a first return of 
income may adopt such practice subject to approval by the district 
director upon examination of the return.
    (g) A taxpayer using the last-in, first-out inventory method in 
conjunction with retail computations must adjust retail selling prices 
for mark-downs as well as mark-ups, in order that there may be reflected 
the approximate cost of the goods on hand at the end of the taxable year 
regardless of market values.

[T.D. 6500, 25 FR 11726, Nov. 26, 1960, as amended by T.D. 8131, 52 FR 
10084, Mar. 30, 1987; T.D. 8482, 58 FR 42234, Aug. 9, 1993]