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TITLE 26-INTERNAL REVENUE CODE method flied at such time and in such manner as the Secretary may prescribe. The change to, and the use of, such method shall be in accor- dance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income. (b) Method applicable In inventorying goods specified in the appli- cation described in subsection (a), the taxpayer shall: (1) Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the tax- able year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year; (2) Inventory them at cost; and (3) Treat those included in the opening in- ventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method. () Condition Subsection (a) shall apply only if the taxpay- er establishes to the satisfaction of the Secre- tary that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of subsection (b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method de- scribed in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year- (1) to shareholders, partners, or other pro- prietors, or to beneficiaries, or (2) for credit purposes. (d) Preceding closing inventory In determining income for the taxable year preceding the taxable year for which the method described in subsection (b) is first used, the closing inventory of such preceding year of the goods specified in the application referred to in subsection (a) shall be at cost. (e) Subsequent inventories If a taxpayer, having complied with subsec- tion (a), uses the method described in subsec- tion (b) for any taxable year, then such method shall be used in all subsequent taxable years unless- (1) with the approval of the Secretary a change to a different method is authorized; or, (2) the Secretary determines that the tax- payer has used for any such subsequent tax- able year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the appli- cation to ascertain the income, profit, or loss of such subsequent taxable year for the pur- pose of a report or statement covering such taxable year (A) to shareholders, partners, or other proprietors, or beneficiaries, or (B) for credit purposes; and requires a change to a method different from that prescribed in sub- section (b) beginning with such subsequent taxable year or any taxable year thereafter. If paragraph (1) or (2) of this subsection ap-. plies, the change to, and the use of, the differ- ent method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income. (Aug. 16, 1954, c. 736, 68A Stat. 159; Oct. 4, 1976, Pub. L. 94-455, title XIX, f§ 1901(b)(36)(A), 1906(b)(13)(A), 90 Stat. 1802, 1834.) AMENDMENTS 1976-Subsecs. (a), (c), (e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (M. Pub. L. 94-455, § 1901(b)(48)(A), struck out subsec. (f) which provided for a cross reference re- lating to involuntary liquidation and replacement of LIFO inventories. EFFECTIvE DATE or 1976 AMENDMENT Amendment of subsec. () by section 1901(b)(36)(A) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENcES LIFO inventory, taxability of corporations on distri- bution, see section 311 of this title. SECTION REFERED TO IN OTHER SECTIONS This section is referred to in section 311 of this title. PART III-ADJUSTMENTS Sec. 481. Adjustments required by changes in method of accounting. 482. Allocation of income and deductions among tax- payers. 483. Interest on certain deferred payments. AMENDMENTS 1964-Pub. L. 88-272, title II, § 224(b), Feb. 26, 1964, 78 Stat. 79, added item 483. § 481. Adjustments required by changes in method of accounting (a) General rule In computing the taxpayer's taxable income for any taxable year (referred to in this section as the "year of the change")- (1) if such computation is under a method of accounting different from the method under which the taxpayer's taxable income for the preceding taxable year was computed, then (2) there shall be taken into account those adjustments which are determined to be nec- essary solely by reason of the change in order to prevent amounts from being duplicated or omitted, except there shall not be taken into account any adjustment in respect of any tax- able year to which this section does not apply unless the adjustment is attributable to a change in the method of accounting initiated by the taxpayer. (b) Limitation on tax where adjustments are substan- tial (1) Three year allocation If- (A) the method of accounting from which the change is made was used by the taxpay- er in computing his taxable income for the 2 taxable years preceding the year of the change, and Page 371