
    404 F. 2d 939
    GIMBEL BROTHERS, INC., ET AL. v. THE UNITED STATES
    [Nos. 433-61 and 360-62.
    Decided December 13, 1968]
    
      
      Lyman G. Friedman, for plaintiffs. Robert A. Schulman, attorney of record.
    
      Philip R. Miller, with whom was Assistant Attorney General Mitch&ll Rogovim, for defendant. Michael I. Sanders, of counsel.
    Before CoweN, Chief Judge, Dureee, Davis, ColliNs, Skelton and Nichols, Judges.
   Per Curiam:

This case was referred to Trial Commissioner Saul Bichard Gamer with directions to make findings of fact and recommendation for conclusions of l'aw under the order of reference and Buie 57(a). The commissioner has done so in an opinion and report filed on November 30,1967. Exceptions to the commissioner’s opinion, findings and recommendation for conclusion of law were filed by plaintiffs and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner’s opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, insofar as plaintiffs’ petitions assert claims based upon plaintiffs’ right to use the LIFO method of inventory valuation for their fiscal years 1943,1944,1945 and 1946, the petitions are dismissed.

OPINION oe Commissioner

Gamer, Commissioner:

In these consolidated proceedings, plaintiffs seek to recover over $4,635,700 as alleged over-payments of income, declared value excess profits, and excess profits taxes, for their taxable years ended January 31,1943, 1944, 1945, and 1946, plus interest thereon.

The primary issue is plaintiffs’ right to compute the value of their inventories during such years on the last-in, first-out (LIFO) basis provided in Section 22(d)(1)(B) of the Internal Revenue Code of 1939, as amended. 26 U.S.C. § 22(d) (1)(B)(1946).

Under Section 22(d) (2) (A) an “application to use such method” was required to be “filed at such time and in such manner as the Commissioner [of Internal Revenue] may prescribe.”

In early 1942, plaintiffs were ineligible to use LIFO and had not filed any application to use the method. Section 22(d) (2) (B) of the 1939 Code and the regulations issued thereunder (Treasury Regulations 101, as amended by T.D. 4959 (1940-1 Cum. Bull. 22), approved December 28, 1939) then prevented taxpayers from using LIFO if they had used, in reporting to shareholders (among others) or for credit purposes, any procedure other than LIFO for any period during the first taxable year for which, pursuant to their applications, the LIFO method was to be used. Plaintiffs had, following their consistent practice, issued an interim report to their stockholders for the period February- 1, 1941, to July 31, 1941, which had been prepared on the first-in, first-out (FIFO) method of inventory valuation. Plaintiffs had theretofore always used such FIFO method.

However, legislation was at that time under consideration by the Congress which was designed to remove the prohibition against the adoption of LIFO for a year during which an interim report on a non-LIFO basis had been issued. All that was proposed to be required was that the annual report be made on a LIFO basis. As of April 9,1942, plaintiffs’ Annual Report for the year ended January 31, 1942, had not as yet been issued. In anticipation of the passage of such amendatory legislation, the Board of Directors of Gimbel Brothers, Inc., at a special meeting held on such date, decided that it would be in the company’s best interests henceforth to adopt the LIFO method in preparing its financial statements, and that the company’s Annual Eeport to its stockholders for the year ended January 31, 1942, should, in order to make the company eligible for the use of such method on its tax returns commencing with such year when and if the legislation was passed, be issued on such basis. On April 11,1942, such report for fiscal 1942 was issued with inventories valued by LIFO, the report noting that there was “reason to believe” retroactive legislation would make this permissible for tax purposes. However, when, on July 13, 1942, plaintiffs filed their returns for such fiscal year, no such legislation had as yet been passed, and such returns were filed on the FIFO method of inventory valuation.

The amendatory legislation was, however, passed as part of the Eevenue Act of 1942, approved October 21, 1942 (56 Stat. 798). Section 118 of the Act removed the prohibition against the adoption of LIFO for a year during which an interim report had been issued on a non-LIFO basis, such change being made retroactive to taxable years commencing after December 31,1938. Although the Act still required that annual reports be made on the LIFO basis, plaintiffs were nevertheless eligible to apply LIFO commencing with fiscal 1942 because, as stated, in anticipation of the passage of such retroactive legislation, they had issued their annual report on such basis.

Following the approval of the Act, the then applicable regulations (Treasury Eegulations 103) were amended !by T.D. 5199, 1942-2 Cum. Bull. 81, approved December 10, 1942. As amended, the pertinent regulation (Treasury Regulations 103, Section 19.22(d)-3), headed “Time cmd Manner of Maldng Election,” provided that a taxpayer could adopt and use the “elective inventory method” '(i.e., LIFO) only if he filed with his return for the taxable year as of the close of which the method was first to be used a statement on a form designated as “Form 970 (Eevised)” of “his election to use such inventory method,” or if such return was filed prior to March 10,1943 (as plaintiffs’ were), then such Form 970 would similarly, if they wished to employ LIFO commencing with, fiscal 1942, have to be filed “prior to such date” of March 10, 1943. Later that month, plaintiffs’ responsible officials again considered the problem of using LIFO inventories with respect to the tax returns for fiscal 1942 which had already been filed in July 1942, and reaffirmed their previous decision to adopt such method commencing with such fiscal year. Accordingly, their accountants were instructed to prepare and file the necessary statements of election (i.e., the Forms 970) to use such inventory method commencing with such year, as well as refund claims for such year, since such use of LIFO for that year would produce lower profits and taxes. On March 31,1943, such statements of election and refund claims were filed.

Plaintiffs had so decided in 1942 to evaluate their inventories on the basis of LIFO in their Annual Report to stockholders, and in 1943 to file LIFO statements of election under the Internal Revenue Code, despite the fact that all during this period the Bureau of Internal Revenue was taking the position that, for tax purposes, retailers such as plaintiffs were not entitled to use the method. The Bureau felt that, since Section 22(d)(1) of the Code referred to the LIFO method of “inventorying goods specified in the application,” such method was available only to taxpayers who applied it to the cost of specific inventory items or goods and not to those taxpayers such as plaintiffs (and other retailers) who evaluated their inventories, as was customary under the so-called “retail method,” by taking and recording the inventory by department dollar totals at retail and at cost, and not by specific items. Apparently plaintiffs had hoped that the Revenue Act of 1942 would expressly reverse the Bureau’s position on this matter, but the Act failed to do so.

Shortly after the filing on March 31,1943, of their LIFO statements of election, i.e., on April 20, 1943, the Board of Directors of Gimbels met to consider the proposed Annual Report to be issued to the stockholders for the fiscal year ended January 31, 1943, which the auditors had prepared on the LIFO basis (as they had the 1942 report). However, at the meeting the auditors reported that the Bureau was still adamant that taxpayers employing the retail method of recording inventories could not elect to use LIFO for tax purposes. They then pointed out the disadvantages of keeping books on a LIFO basis but filing tax returns on a FIFO basis, as required by the Bureau, with each basis producing different profit results, and reported that many department stores were, for these reasons, reverting to FIFO. The Board then decided to abandon LIFO and to revert to FIFO. The other plaintiffs also so concluded. Further, plaintiffs decided to withdraw their statements of LIFO election filed just three weeks earlier (and upon which no action had as yet been taken), as well as their refund claims with respect to fiscal 1942.

Thereupon, plaintiffs’ Annual Keport for fiscal 1943 was, on April 24, 1943, issued on the basis of FIFO, the stockholders being advised that the legislation enacted subsequent to the issuance of the 1942 report “was only part of that contemplated at the time the report was issued,” and that “it has been determined, therefore, to abandon the £last-in first-out’ method of inventories and to return to the method formerly in use, and to adjust the figures for the year ended January 31,1942 accordingly.” In addition, on April 26 and 28,1943, plaintiffs sent letters to the Bureau advising that they “desired to withdraw” the refund claims and their “applications for change in inventory method.”

Thereafter plaintiffs’ Annual Reports and tax returns for fiscal 1943,1944,1945 and 1946, the years herein involved (as well as for 1947), were all issued and computed on the basis of FIFO.

However, in 1947 the Tax Court, in Hutzler Brothers Co., 8 T.C. 14, decided that the petitioner, a department store which had also filed a statement of election to use LIFO beginning with its fiscal year ended January 31,1942, and had so computed its tax for such year, was not, simply because it recorded its inventory under the retail method by department dollar totals at retail and at cost, and not by specific items, precluded from using LIFO under 'Section 22(d) of the Code.

In February 1948, the Board of Directors of Gimbels decided that, since the Treasury Department had apparently acquiesced in the Hutzler decision, thus entitling Hutzler to compute its taxes on LIFO for 1942 and thereafter, plaintiffs too would, in their forthcoming annual reports, restate their earnings for the preceding fiscal years 1942-1947 on a LIFO basis and, relying on their previously filed statements of election and refund claims for fiscal 1942, would seek further refunds for the fiscal years ended 1943-1947. On March 9, 1948, the Treasury Department issued regulations (T.D. 5605, 1948-1 Cum. Bull. 16) adopting the principles enunciated in Hutzler, thereby definitely indicating acquiescence, and in April 1948, Gimbels’ Board decided to issue the fiscal 1948 Annual Report on the LIFO basis, with earnings for 1942-1947 restated on such basis, and also thereafter to file plaintiffs’ tax returns on such basis. In December 1948, plaintiffs filed refund claims for the taxable years 1943-1947 based on their LIFO elections beginning with their fiscal year ended January 31,1942, thereby fixing the cost of their inventories (the “base value”) as of February 1,1941.

However, in 1953, plaintiffs’ claims for refund with respect to fiscal 1942 were disallowed because their Form 970 statements of election were not filed until March 31,1943, which was beyond the March 10, 1943, deadline specified by the above-mentioned regulation, and, further, because such statements in any event had been withdrawn by plaintiffs’ above-referred-to letters of April 26 and 28,1943, and in Kaufmann and Baer Company and Gimbel Brothers, Inc. v. United States, 133 Ct. Cl. 510, 137 F. Supp. 725, cert. denied, 352 U.S. 835 (1956), such denial was upheld on the ground of plaintiffs’ failure to file a timely election to change to LIFO, the validity of the regulation fixing March 10,1943 as the deadline being sustained.

Thereafter, plaintiffs’ refund claims with respect to their fiscal years 1943-1946 were, in 1959 and 1960, also disallowed, and these suits followed.

Plaintiffs here contend that even though their statements o'f election were untimely filed as to fiscal 1942, such statements should nevertheless be deemed to constitute timely filed statements with respect to the subsequent years herein involved. On the basis thereof, and allegedly having met all the other necessary requirements, plaintiffs contend, therefore, that they are entitled to have their taxes for such subsequent years computed on the LIFO basis.

For the following reasons, it is concluded that the disallowance of plaintiffs’ fiscal 1943-1946 refund claims was proper:

1. For none of such years did plaintiffs file the statements of election (Form 970) required by the above-mentioned provisions of the Code and the regulations. As shown, the pertinent regulation specifically provided that LIFO “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 f/rst to be used * * * a statement of his election to use such inventory method.” (Italics supplied.) The taxable year “as of the close of which the method is first” proposed “to be used” by plaintiffs, as here now contended for, is their fiscal year ended January 31, 1943. But the only Form 970 they ever filed was one which sought to have fiscal 1942 as such first year.

Thus, although plaintiffs now contend they should be permitted to use LIFO beginning with their taxable year ended January 31, 1943, they did not, as required, file “with” their tax return for such year, or indeed with any of the returns for the other three years herein involved, any election to use the LIFO method of inventory valuation. Indeed, their tax return (and annual stockholders’ report) for fiscal 1943 utilized the FIFO method (as did the returns and reports for the other three years). Thus, there is a plain failure on plaintiffs’ part to meet the initial, basic filing requirement for the adoption of LIFO and its use for all the years here involved.

Plaintiffs argue, however, that the Forms 970 which they did file electing to change to LIFO commencing with fiscal 1942 constituted a valid statement of election to use LIFO not only for fiscal 1942 but also for all future years, and that, if they did not serve as effective elections to commence such use for fiscal 1942, then they nevertheless automatically constituted elections to commence with the next following year, i.e.. 1943. Plaintiffs rely on the wording of the Forms 9T0 they filed in support of their contention that two separate matters were covered by such filing, i.e., (1) an election (irrevocable, they contend) thenceforth to adopt and use LIFO, and (2) a proposal to have the method first applied commencing with their taxable year ended January 31,1942. The Form 970 wording relied on is that the taxpayer “hereby makes application to adopt and use the elective inventory method * * * and to have such method first applied as of the close of the taxpayer’s taxable year ending- * * *.” (Italics supplied.) Emphasis is placed on the word “and,” used, it is claimed, in the disjunctive sense. Even though the second part of the election to commence LIFO with fiscal 1942 could not be effected, they were still entitled, and indeed obliged, they say, to use LIFO for the subsequent years in accordance with the first part of the statement, which in effect constituted (quite early, they admit) a valid election to commence with the first eligible year thereafter, in this case 1943, since it turned out that the election was untimely as to the 1942 year specified.

These contentions must be rejected. They would again result in the circumvention of the specific requirement of the regulation that LIFO may be adopted and used only if the return for the first taxable year to which the method is to be applied is accompanied by the election statement. Although plaintiffs now claim fiscal 1943 as such “first taxable year,” it is nevertheless conceded that no such election statement was filed “with” the tax return for such year. The statement of election filed on March 31, 1943, untimely designating fiscal 1942 as the beginning LIFO year, cannot serve to fill the void created by the lack of any statement having been filed “with” the 1943 return or designating 1943 as such “first taxable year.”

The specification of the first year for the employment of the LIFO method is not a meaningless technicality. It goes to the very heart of the election, for it establishes the date of the base value of the inventory (the “base stock”) which, under the last-in, first-out fiction, carries through to all subsequent years. An election to commence LIFO with fiscal 1942 would use as the base value the cost of the inventory as of the beginning of that year, i.e., February 1,1941, whereas an election to commence with fiscal 1943 would use as such base value the cost as of a year later, which, during an inflationary period, might well be substantially higher. Indeed, the basic purpose that LIFO is intended to serve is to eliminate the element of inflation from inventory values. A taxpayer might well wish to commence his LIFO inventory valuations with 1942, but not with 1943, after an amount of inflation has already crept into his inventory, with his base value thus being pegged at a higher level. For, while LIFO will produce lower profits during an inflationary period (due to lower inventory values), it will result in higher profits during a deflationary period (since the base value of the inventory may be pegged at a higher level than the “lower of cost or market,” a method of valuation usable only with FIFO). Thus, and especially during a war period such as was 1942-1943, a LIFO elector in effect gambles on the inflation-deflation situation (there was a precipitous, and in some cases ruinous, price and inventory decline at the end of World War I), and the time of the taxpayer’s entry into the cycle is all-important. In passing on the taxpayer’s application, the Bureau could not possibly assume that a taxpayer electing LIFO to commence with one year would, if it turned out he was not eligible for such year, want to commence with another year, nor is it at all certain that plaintiffs, had they been confronted with the choice at that time, would have chosen to enter the cycle in 1943. Indeed, under plaintiffs’ theory, they would be obliged to apply LIFO in their first taxable year subsequent to 1942 which otherwise qualified under the statute and regulations even though they presumably would not have chosen to initiate LIFO at the price levels prevailing in such subsequent year. This doctrine could be disastrous for a taxpayer. Of course, with the benefit of hindsight, plaintiffs now choose to enter as of 1943, but the very essence of the election is to make a choice for the future, and not for the past.

Not only is the designation of the “first year” all important from the taxpayer’s point of view, it is also of major significance insofar as the Bureau’s approval of the application is concerned. The data required to be furnished on the election Form 970 included an analysis of inventories as of the beginning and end of the specified taxable year for which LIFO was first proposed to be used, as well as of the beginning of the prior taxable year. Thus, plaintiffs’ analysis on the untimely application form they did file set forth the inventory values for the fiscal year ended January 31, 1942, its then proposed “first year,” on both the LIFO and FIFO bases, and for the two prior taxable years, on only the FIFO basis. No inventory figures on LIFO and FIFO bases were, naturally, submitted with respect to fiscal 1943, the “first year” now claimed, but which figures would, however, have been required had such year been contemporaneously proposed as the “first year.” These analyses were required by Form 970 to aid the Bureau to determine, as the form indicated, whether any adjustments in the inventories of prior taxable years would be necessary “in order that the true income of the taxpayer will be clearly reflected.” This requirement was pursuant to Section 22(d) (3) of the 1939 Code which provided that “ [t]he change to, and the use of, [the LIFO] method shall be in accordance with such regulations as the Commissioner * * * may prescribe as necessary in order that the use of such method may clearly reflect income.” Section 22(d) (4) further provided that “[i]n determining income for the taxable year preceding the taxable year for which such method [LIFO] is first used, the closing inventory of such preceding year * * * shall be at cost.” This “clear reflection of income” problem is of vital importance in the Commissioner’s approval consideration of the LIFO application. See John Wanamaker Philadelphia, Inc. v. United States, 175 Ct. Cl. 169, 359 F. 2d 437 (1966). Different figures for different years might well, of course, affect the Commissioner’s approval determination, or the conditions therefor.

Plainly, a valid designation of the “first year” for which the elective inventory method (LIFO) is proposed to be used is so integral a part of the election itself that it cannot be considered separate and apart from it. The attempted LIFO application beginning with the fiscal year ended January 31, 1942, and based upon inventory values as of February 1,1941, having failed because of untimeliness, plaintiffs should, if they then wanted to apply for the adoption and use of the elective inventory method to commence with fiscal 1943, have filed a Form 970 “with” their 1943 return designating 1943 as the “first year” and furnished all of the pertinent data concerning the 1943 and prior years’ inventories which the form required. That plaintiffs did not then realize that their application was untimely does not serve to excuse their own negligence and fault.

The conclusion herein arrived at is in accord with R. H. Macy & Co., et al. v. United States, 202 F. Supp. 206 (S.D.N.Y. 1961), aff'd per curiam, 311 F. 2d 575 (2d Cir. 1963), where the court, after also having first rejected, in R. H. Macy & Co., et al. v. United States, 255 F. 2d 884 (2d Cir.), cert. denied, 358 U.S. 880 (1958), the taxpayers’ refund claims for fiscal 1942, their claimed first LIFO year, for lack of a timely filing of a Form 970 with respect to such year, similarly rejected their claims for refund for the years 1943-1947, no election Form 970 having been filed for any of such subsequent years. Indeed, in affirming per cwriam the dismissal of the taxpayers’ 1943-1947 claims solely on the authority of the first Macy case dismissing the 1942 claim, the Second Circuit must have necessarily held, contrary to the “divisibility” theory here urged, that the lack of a timely filing with respect to 1942 left the taxpayers without any valid outstanding LIFO election at all, either with respect to 1943 or any of the other subsequent years.

Missouri Public Service Company v. United States, 370 F. 2d 971 (8th Cir. 1967), upon which plaintiffs strongly rely in support of their contention that elections, though “premature,” are nevertheless binding and applicable to subsequent years, is inapposite. Not only are different Code sections, a different type of election, and entirely different considerations involved, but under the pertinent regulations the election which was the subject of the controversy could “be adopted without permission and no formal election is required.” Missouri Public Service Company, supra, 370 F. 2d at 973. Furthermore, an analysis of the case shows that it is in fact far from helpful to plaintiffs. The court held that an election made by the taxpayer concerning a method of depreciation was in fact not premature simply because the depreciation deductions could not commence on the particular property involved until the following year, when it was actually put into use. The taxpayer (unlike plaintiffs) had, during the subsequent years, in fact applied the elected method, but later (like plaintiffs) attempted to reverse the situation for all such years, claiming its original “premature” election to have been invalid (because the method could not be applied to the year of election). The court rejected the attempt, holding that, even if the original election be deemed to have been “premature” ('although the court did not so consider it), the taxpayer’s continuing use of the originally selected method nevertheless constituted new elections. It described such attempt as resulting from “belated hindsight” (at 975), a characterization peculiarly applicable to plaintiffs’ attempt herein.

2. In any event, whether or not plaintiffs’ statements of election (Form 970)1 be properly construed, as plaintiffs contend, as “divisible” and therefore applicable to 1943 as the “first year,” even though not designated as such, it is plain that such statements were nevertheless effectively withdrawn. Thus, plaintiffs cannot stand on such elections at all and, as shown, there are no others.

Such withdrawals were effected by plaintiffs’ letters of April 26 and 28,1943, to the appropriate Collectors of Internal Kevenue stating that “we desire to withdraw” the “applications for change in inventory method” and the refund claims filed therewith, as well as by a second letter of May 5, 1943, from Kaufmann and Baer to the Commissioner of Internal Revenue stating that “we desire to withdraw this claim for refund and also to withdraw, or cancel, our application for a change in our inventory method.”

Plaintiffs contend, however, that these revocations are a nullity because there was never any formal notification that they were approved by the Commissioner of Internal Revenue. The filing of a statement of election (Form 970) results, plaintiffs argue, in irrevocable elections to use LIFO for all subsequent years and can thereafter be withdrawn, or such use of LIFO abandoned, only with the express consent of the Commissioner, which, they say, was never given. They point out that under Section 22(d) (5) of the 1939 Code, as well as the pertinent regulations issued thereunder (Keg. 103, Sec. 19.22 (d)-5; C.F.K. 1940 Supp., Yol. 2, p. 1881), and tlie Form 970, elections to use LIFO are irrevocable unless permission to change is granted by the Commissioner.

It is clear that plaintiffs misread these provisions in construing them to provide that a mere filing of a Form 970 automatically, and even prior to any approval of the application by the Commissioner, prevents the withdrawal thereof and compels the use of LIFO thereafter. The correct interpretation of all the provisions relied on, read in proper and full context, rejects such an illogical result. No reason is apparent why a taxpayer should not be privileged to withdraw a refund claim or an application to use LIFO prior to the Commissioner’s taking any action thereon, and it is plain that that was exactly what plaintiffs then wished to do and felt they could do.

The obvious meaning of the Code and regulation provisions upon which plaintiffs rely is that when LIFO is used both in the elector’s annual report and tax return for the base year specified in the election statement and the Commissioner approves the election, then the use of LIFO is required for all subsequent years unless, of course, the Commissioner thereafter approves a change therefrom. Naturally, once an accounting method is, with the approval of the Commissioner, adopted, its use must be continued if income is not to be distorted from year to year.

The provision in the above-mentioned Code section upon which plaintiffs rely to the effect that if LIFO is used for “any taxable year, then such method shall be used in all subsequent taxable years unless with the approval of the Commissioner a change to a different method is authorized,” is prefaced with the condition “[i]f a taxpayer, having complied with paragraph (2) * * *.” The “paragraph (2) ” referred to is Section 22(d) (2), which, in subparagraph (B), provides that LIFO may be used “[o]nly if the taxpayer establishes to the satisfaction of the Commissioner” certain matters. Obviously, therefore, approval by the Commissioner is presupposed. And the regulation relied on, in referring to the “method once adopted” being “irrevocable” and required to be used “in all subsequent taxable years, unless the use of another method is required by the Commissioner or authorized by him pursuant to a written application therefor filed with him * * *” similarly presupposes an election that has been approved, for under the statutory scheme, the method cannot be deemed to have been effectively “adopted” without such approval. Furthermore, Section 19.22(d)-2(g) of the same regulation specifically provides:

The elective inventory method [LIFO], once adopted by the taxpayer with the approval of the Commissioner, shall be adhered to in all subsequent taxable years * * * (Italics supplied),

with Section 19.22 (d)-3 further providing:

Whether or not the taxpayer’s application for the adoption and use of the elective inventory method should he approved, and whether or not such method, once adopted, may be continued, * * * will be determined by the Commissioner in connection with the examination of the taxpayer’s returns. (Italics supplied.)

Plainly, the only rational construction of all these provisions is that an election application must be approved to become effective, and that, therefore, an unapproved application does not constitute an irrevocable election. It may, therefore, be withdrawn. Cf. National Lead Company v. (commissioner, 336 F. 2d 134 (2d Cir. 1964), cert denied, 380 U.S. 908 (1965).

Plaintiffs argue that they did not intend, by their withdrawal letters, to effect “unilateral” withdrawals, which, they contend, they were powerless to effect, 'but that instead they were merely seeking permission to withdraw. This is indicated, they say, by their statements that they merely “desire [d] to withdraw” the applications. They then felt, they say, that until their requests received the express approval of the Commissioner, they were still bound by their elections.

The record fails to support these contentions. Instead, it makes plain that when plaintiffs said they “desire[d]” to withdraw their refund claims and LIFO applications, they intended to give notice of a decision they had made and already effectuated, and that there was, therefore, no election request remaining outstanding upon which the Commissioner could act. As set forth above, the decision to abandon LIFO and revert to FIFO, and to withdraw the 1942 refund claims, was made at a meeting of the Board of Directors of Gimbels held on April 20,1943, only three weeks after the Forms 970 had been filed. Gimbels’ Annual Report to stockholders, issued April 24, 1943, just prior to plaintiffs’ withdrawal letters, stated flatly: “It has been determined * * * to abandon the ‘last-in first-out’ method of inventories and to return to the method formerly in use * * There is no indication here that plaintiffs had decided merely to seek permission to abandon LIFO and that pending such permission they felt they would be obliged to continue with LIFO. Furthermore, as such Annual Report further shows, the figures for fiscal 1942, the only year to which LIFO had been applied and the proposed “first year” in plaintiffs’ applications, were adjusted to a FIFO basis. And thereafter, for all the years herein involved, plaintiffs’ books, annual reports, and tax returns were all kept, issued, and filed on the basis of FIFO. As the court pointedly observed in Kaufmann and Baer, supra:

* * * Notwithstanding the fact that plaintiff now contends that it was bound by its election to use LIFO, it consistently filed its tax returns on the FIFO basis and reverted to the FIFO basis in its reports to its stockholders. (133 Ct. Cl. at 518.)

On the basis of the whole record herein, the conclusion is again compelled that “* * * it is obvious that plaintiff intended to withdraw both its election and claim for refund and this was so understood by the Commissioner.” (Kaufmann and Baer, supra, 133 Ct. Cl. at 516.)

Thus, as a result of valid and effective withdrawals, there were no outstanding statements of LIFO election applicable to fiscal 1943, the “first year” here relied on, or to any of the other years herein involved. Plaintiffs cannot, therefore, succeed in recovering on a LIFO basis for any of such years.

3. Finally, plaintiffs are in any event ineligible to qualify for LIFO for any of the tax years here involved because their annual reports for such years valued their inventories on the basis of FIFO. Section 22(d) of the Code specifically provides that a taxpayer may not use LIFO with respect to any taxable year if it used any other method in any of certain designated types of reports or statements, including reports to shareholders covering such year. Obviously, a taxpayer should not be permitted to report higher profits to its shareholders than it reports to the Government for tax purposes.

Plaintiffs urge, however, that they should be regarded as in effect having been on a LIFO basis during the years in question because, commencing with fiscal 1943, they established a reserve which, they say, was intended to approximate the results which would have been obtained had they actually used LIFO to value their inventories.

This contention cannot be accepted. The “reserve” in question was, as set forth in the fiscal 1943 report, labeled “reserve for post-war contingencies.” For the other years here involved, it was termed as a “reserve for war and post-war contingencies.” Although, because it was established in 1943 coincident with plaintiffs’ decision to abandon LIFO and revert to FIFO, it may fairly be concluded that such reserve was intended to have some relationship to a protection against a postwar inventory deflation, it does not, nevertheless, appear that this “reserve” specifically related solely to inventories or that it was intended in effect to constitute a LIFO valuation technique. The reserve was in the round figure of $500,000, and was applied to the restatement of the 1942 figures. No addition at all was made to the reserve with respect to the 1943 financial statements, although it was then known that LIFO profits were $114,000 less for such year than profits calculated on the basis of FIFO. Three $1,000,000 additions were thereafter made to the reserve in fiscal 1944,1945, and 1946. There are no calculations showing that any of these reserve amounts resulted from any effort to approximate the results of a LIFO inventory valuation calculation on any recognized or accepted basis, such as, as plaintiffs contend, the use of price indices. Instead, as plaintiffs’ own 1948 Annual Report setting forth the LIFO and FIFO figures for such years shows (finding 29(c)), a LIFO calculation would not approximate these results. While it is possible to use an appropriate “inventory reserve” in a proper amount as one method of achieving LIFO results, i.e., removing inflation from inventory values (Rev. Ruling 60-244, 1960-2 Cum. Bull. 167), the general reserve here relied on, vaguely labeled “for war and post-war contingencies”, made up of round, lump-sum figures, and not specifically related to the inventory valuations which appeared on the “Assets” side of the financial statements but instead separately appearing on the “Liabilities” side, cannot be accepted, as plaintiffs argue, as constituting merely a substitute method of applying LIFO. Similarly, on the profit and loss statement the reserve was applied after the calculation of “Net Profit” to which the inventory valuation, reflected in the “cost of goods sold” item, contributed. But, plainly, the LIFO method of valuation, whether or not used with a reserve, will in itself enter into the calculation of such profit figure in the first place. Cf. John Wanamaker Philadelphia, Inc. v. United States, supra, where the retailer taxpayer there involved had a specific inventory reserve that was carried in the inventory account itself.

What plaintiffs themselves contemporaneously said in their annual reports about their inventories clearly refutes their present contentions. As noted, in Gimbels’ 1942 report, it was stated that thenceforth., and commencing with such report, LIFO would be employed. However, the 1943 report clearly stated: “It has been determined * * * to abandon the ‘last-in first-out’ method of inventories and to return to the method formerly in use, and to adjust the figures for the year ended January 31, 1942 accordingly.” Nothing was said to the effect that the purpose of the establishment of the reserve in connection with the restatement of the 1942 figures on a FIFO basis (for comparison with 1943, also calculated on FIFO) was to approximate LIFO. Nothing was added to the reserve for 1943, although a LIFO approximation would have called therefor. And all of the annual reports thereafter similarly stated that FIFO had been employed for the inventory valuations (i.e., described as “cost or market, whichever is lower, as determined by the retail inventory method”) with the “net profit” figures set forth therein computed on such FIFO basis. It was not until 1948, after the Hutzler decision and the Treasury Department’s acquiescence in it, that plaintiffs reversed their position. But even then they recognized that they had not been on LIFO during the previous years herein involved and that this was the serious obstacle they were facing. The Gimbels Annual Beport for said year specifically referred to plaintiffs “having abandoned” LIFO after 1942, to the 1942-1947 figures now being “restated to the LIFO basis”, and to FIFO as the method “formerly in use”.

Tn H. C. Godman Company v. Busey, 51 A.F.T.R. 1482 (S.D. Ohio 1956), the court similarly rejected a taxpayer’s effort in 1948 to prove a consistent use of LIFO for prior years by the use of a contingency reserve deduction from income, reliance instead being placed on the contemporaneous reports themselves which made plain that the inventories had been calculated on the basis of the lower of cost or market (contrary to the requirement that LIFO be used only on the basis of cost).

In summary, it is concluded that (1) no statement of LIFO election was, as required, filed for fiscal 1943, the “first year” here relied upon, or for any of the other years here involved, and that the untimely filed statement designating 1942 as such base year does not qualify as a fulfillment of such requirement; (2) in any event, the 1942 statements of election were effectively withdrawn; and (3) during the years herein involved, plaintiffs’ inventories were not, as required, evaluated on a LIFO basis in their annual reports to shareholders.

Plaintiffs’ contentions concerning discrimination are without merit. Despite the provisions of the Code as they existed prior to the Eevenue Act of 1942 making taxpayers ineligible to use LIFO if they had issued any interim financial report to stockholders (among others) on a basis other than LIFO, it appears that some retailers ineligible for such reason filed statements of election Form 970 anyway during such period in the confident expectation that the law would be amended so as to eliminate such obstacle to the use of LIFO. Their expectations were fulfilled. The Revenue Act of 1942 removed the prohibition provided the taxpayer’s a.rmna.l report was prepared on the LIFO basis, which change was made retroactive to tax years beginning after December 31, 1938, and the Commissioner thereafter apparently accepted their Forms 970. Because the taxpayers were not eligible for LIFO when they filed their Forms 970, but only became so later, plaintiffs complain about the acceptance of such taxpayers’ “premature” elections, but not plaintiffs’ elections, which they contend, although late for 1942, should at least be regarded as constituting prematurely filed elections for 1943 (despite the fact 1943 was nowhere mentioned in the election). Obviously, the two situations are entirely different, one constituting a retroactive statutory removal of a previous bar so as to validate an otherwise timely filed and valid election, the other consisting of an election untimely filed and never thereafter validated by amendatory legislation or otherwise (and, as shown, subsequently withdrawn anyway).

Nor is there any discrimination against plaintiffs because other retailers (like Hutzler) with timely filed Forms 970, who otherwise qualified for LIFO, but who had used, in their attempt to eliminate inflation from their inventories, certain price level indices (i.e., those computed by the National Industrial Conference Board) to measure the amount of such inflation in their LIFO computations, were nevertheless later permitted to amend their forms so as to use instead the indices that the Commissioner, after the Hutzler decision, ultimately approved for such use (i.e., those prepared by the Bureau of Labor Statistics). Where it was plain that the taxpayer had in fact used LIFO, permission to adjust the LIFO figures by the use of different price level indices is an entirely different matter from permitting taxpayers who had not used LIFO at all suddenly to adopt its use on a retroactive basis covering many prior years, it having become plain that it would have been advantageous to have been on such method all along.

For all the above reasons, the petitions herein, insofar as they assert claims based on the right to use the LIFO method of inventory valuations during plaintiffs’ fiscal years 1943-1946, should be dismissed.

FINDINGS oe Fact

1. By order dated April 3, 1964, these cases were consolidated for purposes of trial and opinion.

2. Plaintiff Gimbel Brothers, Inc. (hereinafter sometimes referred to as “Gimbels”), is, and at all times hereinafter mentioned was, a corporation duly organized and existing under the laws of the State of New York and maintains its principal place of business at 1275 Broadway in the City and State of New York.

3. During the taxable years ended January 31, 1943, through January 31, 1946, inclusive, Gimbels was the common parent of an affiliated group of corporations as then defined in Section 141 of the Internal Bevenue Code (hereinafter sometimes referred to as the “affiliated group”). Gimbels is the plaintiff designated in the petitions filed herein as plaintiff No. 1. The other listed plaintiffs were, during such years, the other members of the affiliated group.

4. So far as is here material, all of the members of the affiliated group presently are existing under the laws of their respective states of incorporation or all of their property rights, privileges and franchises have, as a result of dissolution or merger, become vested in and presently are held by Gimbels or plaintiff Saks & Company (plaintiff No. 18 in both petitions).

5. During the taxable years ended January 31, 1943, through January 31, 1946, plaintiffs Gimbels, Saks & Company, and Kaufmann and Baer Company (said three plaintiffs hereinafter sometimes being collectively referred to as “the merchandising members of the affiliated group”) were the only members of the affiliated group for which retail inventories were an income-determining factor. Thus, although all the plaintiffs were parties to the consolidated tax returns filed for the years here in question and are therefore included as parties plaintiff herein, the activities of none of the other plaintiffs are material to the issues here involved. Therefore, as hereinafter used, the term “plaintiffs,” unless otherwise designated, will refer only to the merchandising members of the affiliated group.

6. At all times here material, plaintiffs, through main and branch stores, were engaged in operating department and specialty stores throughout the United States.

7. Plaintiffs have at all times here material maintained their books of account and filed their income and other tax returns on the basis of a fiscal year ended January 31. They have kept their books of account and filed their tax returns upon the 'accrual basis of accounting.

8. For all years up to and including the fiscal year ended January 31, 1941, plaintiffs valued their inventories on the basis of cost or market, whichever was lower, as determined by the retail inventory method. This method was used for both their accounting and federal income tax purposes.

In determining the cost of the inventory at the end of the fiscal year, this method assumes that an article of merchandise “first-in,” i.e., the article purchased earliest, was the first one sold, and that the articles left in the inventory at the end of the year were the last articles purchased. The cost of the items remaining in inventory at the end of the year would therefore be based on the cost of the last articles purchased. This method is commonly known as FIFO (i.e., the acronym of “first-in, first-out”).

9. Under the retail inventory method, once merchandise comes into a store, the label on the merchandise carries only the retail price and sight is lost of the precise original cost of any particular item in the inventory. The physical inventory at the end of the fiscal year is taken at retail and converted to cost by the use of the “mark-on” percentage. This percentage is determined by the individual departments which, in plaintiffs’ stores, generally exceed 150 in number. The percentage is determined by keeping records of all purchases at both cost and retail. For example, if 1,000 dresses are bought at $10, the cost would be $10,000. If those dresses were marked to retail at $15, the retail price of that particular group would be $15,000 and the result is a markup of 33%%. ($15,000 retail price — $10,000 cost price=$5,000. g=33%%.) If there were no other purchases in that particular department and if at the end of the year there was $6,000 of merchandise, valued at retail, left in the department, the mark-on percentage, the complement of the markup percentage of 33%%, *'.e., 66% %, would be applied to the retail price of $6,000 and a cost of $4,000 determined. Under the retail method that cost figure would be shown in reports to stockholders and others as the cost of the inventory.

However, the retail inventory method employs either the cost to the store or the market value, whichever is lower. Accordingly, assuming that 500 of such 1,000 dresses had been sold at the regular retail price of $15 but the balance had been reduced to sell at a retail price of $12 (retail “markdown” from $15 to $12) and that 100 of those dresses still remained on hand at the end of the year, the retail value of the closing inventory would be $1,200 (100 X $12). If the same mark-on of 66%% were applied to such $1,200 figure, the cost of the inventory would be stated as $800 rather than at the actual cost of $1,000. Thus to arrive at the actual cost, an adjustment must be made to eliminate the retail markdowns before applying the mark-on. However, if the $800 reflected the market value, that figure would be used even though it was lower than the actual cost, since, as stated, the method employs the lower of cost or market.

10. During the years here involved, plaintiffs’ inventories included over 100,000 different items and millions of individual units. Plaintiffs turned over their, inventories approximately four times per year. Individual items in their inventories changed from day to day. Thus the items in the inventory at the beginning of the year had little relationship to the items in it at the end of the year. At the time the physical inventory was taken, it was impossible for plaintiffs to determine the cost of any particular item sold in a specific transaction.

11. In 1941, the country’s economy was continuing to undergo a period of inflation. The resulting price rises caused the total market or replacement value of plaintiffs’ inventories to increase, such increase being reflected in greater taxable profits. Eetailers, including plaintiffs, were seeking a means of eliminating such inflation from their inventories and thus avoiding the payment of higher taxes due to such inflation.

Beginning in 1941, the National Eetail Dry Goods Association, an organization which represents most of the large retail stores throughout the United States, attempted to develop a method of adjusting the inflated values of retailers’ inventories to eliminate said inflation. It worked with the National Industrial Conference Board, a statistical nonprofit organization, to develop price indices on a departmental basis to be used for this purpose.

12. The LIFO («.«., the acronym of “last-in, first-out”) method of inventory valuation, one of the proposed methods by which to remove or minimize the effects of inflation on retailers’ inventories, assumes that an article of merchandise “last-in,” i.e., the article purchased last, was the first sold and that the articles left in the inventory at the end of the year were the first articles purchased. The cost of the items in the inventory at the end of the year would therefore be based on the cost of the first articles purchased.

13. The difference between FIFO and LIFO, insofar as it relates to profits and taxable income, is illustrated (a) in a period of rising prices and (b) in a period of falling prices, as follows:

(a) During a period of rising prices, a retailer starts with one shirt which costs him $2. He buys another for $3. He sells one for $4. His closing inventory and profits on a FIFO and LIFO basis will be as follows:

On the FIFO basis, $1 of the $2 gross margin represents paper profit since the retailer must keep a stock of one shirt. On the LIFO basis, there is no paper profit because LIFO assumes that a retailer’s basic inventory (one shirt in this example) is carried on the books at a stabilized value.

(b) During a period of falling prices, the difference between FIFO and LIFO is illustrated by the following example : Assume that in the following year, the retailer buys another shirt for $2 and sells one for $3 instead of $4. His inventory and profits on a FIFO and LIFO basis for such second year will be as follows :

14. (a) At a special meeting of the Board of Directors of Gimbels 'held on April 9, 1942, it was decided that it would be to the best interest of the company to adopt the LIFO method. The following is an excerpt from the minutes of such meeting:

In connection with their consideration of the financial statements and President’s letter, the Directors gave particular attention to the recommendation that the Company adopt the “last in, first out” method of valuing inventory, heard the report of Mr. Friedman as to conferences in Washington on this subject, and were advised that apparently a number of other companies in the same field of business were proposing to adopt this method. Under these circumstances, and with adequate disclosure to stockholders which was contemplated in the form of statement and letter submitted, it was decided that it would be in the best interest of the Company to adopt the “LIFO” method.

(b) On April 11,1942, the Annual Report of Gimbels and its subsidiary companies for the fiscal year ended January 31, 1942, was issued to stockholders. Such report contained the following paragraph as footnote 1 to the financial statements:

In the preparation of balance sheets and the determination of net profits of prior years, merchandise inventories have been stated on the basis of “cost or market, whichever is lower,” as determined by the retail method of inventories. The use of the basis of “cost or market, whichever is lower” has been continued as at January 31, 1942, but, in arriving at cost, a change has been made to the “last-in first-out” (LIFO) method based upon an index of retail price changes since January 31, 1941. The use of this method for the year ended January 31, 1942 has resulted in (1) a reduction of merchandise inventories by $1,867,469.26 with an approximately corresponding reduction of net profit per books before provisions for federal taxes on income, (2) a reduction of $1,311,000.00 in the provision for federal taxes on income, and (3) a reduction of $556,469.26 '(being the difference between the two figures) in net profits after providing for such taxea While the last-in first-out method may not be used by these companies for tax purposes under the existing provisions of the federal tax laws, there is reason to believe that retroactive legislation may be enacted permitting its use for the year covered by this report. In the event, however, that adequate retroactive legislation is not enacted, the taxable income of the companies for the year ended January 31, 1912 would be increased by approximately the aforementioned $1,867,469.26 and the federal tax liability would be increased by the $1,311,000.00.

(c) The Annual Report of Gimbels and its subsidiary companies for the fiscal year ended January 31,1942 which was filed with the Securities and Exchange Commission and the New York Stock Exchange was prepared on the same basis as indicated in paragraph (b) above.

15. (a) Until October 21,1942, the date of approval of the Revenue Act of 1942, Section 22(d) (2) (B) o'f the Internal Revenue Code of 1939 limited the use of LIFO to taxpayers who could establish as a fact that they had not used any procedure other than LIFO in inventorying (to ascertain income, profit, or loss, for credit purposes, or for the purpose of reports to shareholders, partners, or other proprietors, or to beneficiaries) goods for any period during the first taxable year for which the LIFO method was to be used.

Section 118 of the Revenue Act of 1942 had the effect of removing the prohibition against the adoption of LIFO for a year during which interim reports on a non-LIFO basis had been issued and this amendment was made retroactive to all taxable years beginning after December 31,1938. Until enactment of the Revenue Act of 1942, plaintiffs were therefore ineligible to use LIFO since they had prepared an interim financial statement for the period February 1, 1941, to July 31,1941, which did not use LIFO, and this statement was included in a statement of the consolidated earnings of the Gimbel companies which was published in an interim report distributed to the stockholders of Gimbels, the Securities and Exchange Commission, and the New York Stock Exchange, covering the same six-month period.

(b) The Revenue Act of 1942 was approved October 21, 1942, 56 Stat. 798. The Treasury Regulations 103, applicable at that time, were amended to conform to Sections 118 and 119 of the Revenue Act of 1942 in T.D. 5199,1942-2 Cum. Bull. 81, approved December 10, 1942, and first published in the Federal Register on December 12, 1942, pp. 10366-10368. As amended by paragraph 3 of T.D. 5199, Section 19.22(d)-3 of Treasury Regulations 103 read in part as follows:

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 March 10,1943, the ninetieth day after the approval of Treasury Decision 5199, then at any time prior to such date), in triplicate on Form 970 (revised), and pursuant to the instructions printed thereon and to the requirements of this section, a statement of his election to use such inventory method. * * *

Mr. J. P. Friedman was the partner of Touche, Niven and Company, plaintiffs’ auditors, who was in charge of plaintiffs’ accounts. Neither Gimbels nor Mr. Friedman thought that this quoted language applied to retailers generally or to their own tax problem and they did not ask for any extension of time after March 10, 1943 within which to file Treasury Form 970.

(c) Although said Section 118 of the Revenue Act of 1942 removed the prohibition against the adoption of LIFO for a year during which interim reports on a non-LIFO basis had been issued, it retained the requirement that the annual reports be made on a LIFO basis, and, as set forth above, Gimbels’ final report on its earnings for the year ended January 31, 1942, was prepared by an application of LIFO, as described in such report, to the lower of cost or market retail method basis of inventorying.

16. At the end of December 1942, there was a meeting of plaintiffs’ executives, at which Mr. Friedman was present, to consider the problem of using LIFO inventories with respect to the federal income tax returns which, had already been filed (with inventories 'calculated on the FIFO basis) for the fiscal year ended January 31,1942, for all the Gimbel companies. In discussing the problem Mr. Friedman advised plaintiffs’ executives of the tax disadvantages of the LIFO method in a period of declining prices in that, under the tax laws, the “cost or market, whichever is lower” method could not be used with LIFO (despite the use of such combination by Gimbels in its financial statements for the year ended January 81, 1942), and that should such price declines occur it was possible that plaintiffs would pay more taxes under LIFO than FIFO. In deliberating the possible use of the LIFO method, plaintiffs gave consideration to the then economic climate. The United States was involved in World War II, and although some limitation on price level increases was being effected by the .Government, it was felt that such wartime conditions would result in shortages and inevitably in inflation in the prices of merchandise. While plaintiffs felt that the LIFO method would reduce the effect of such inflation from their operational results during the actual period of inflation, important consideration was also given to the probable aftermath of the war in relation to price levels. Inflation of price levels had occurred during, and a few years after, World War I, but thereafter a precipitous price decline took place which caused the bankruptcy of many retailers. Plaintiffs considered that the use of LIFO during a period of such price declines, coupled with the inability under the tax law to use the “lower of cost or market method” in connection therewith, could result in the payment of higher taxes because the inventories would have to be valued in excess of replacement or market value. As shown in their above-mentioned Annual Keport for the fiscal year ended January 31, 1942, plaintiffs, in preparing their financial statements for such year, had used both the “lower of cost or market” method and LIFO. However, it was at the same time noted that, under the existing tax law, plaintiffs were not entitled to use LIFO for fiscal 1942 (because of the issuance of said interim report on the FIFO basis) unless a satisfactory retroactive amendment would be passed. Plaintiffs were, however, optimistic about tbe passage of such an amendment.

It was decided at the meeting that plaintiffs should file refund claims for the fiscal year ended January 31, 1942, and elections on Form 970 to adopt LIFO beginning with such fiscal year. Mr. Friedman was instructed to prepare the necessary claims and elections and whatever forms were appropriate to permit plaintiffs to adopt LIFO beginning with the fiscal year ended January 31,1942. Plaintiffs relied on Mr. Friedman for the timely preparation of such necessary forms.

17. In accordance with its instructions, Touche, Niven and Company prepared the claims for refund and election documents. These documents were delivered by messenger to plaintiffs on March 25, 1943, with a cover letter (dated March 24, 1943) to the Treasurer of Gimbels that provided in part:

These claims for refund were prepared following a full discussion of entire problems of lifo inventories at which both you and Mr. Bernard F. Gimbel were present. We pointed out the possible dangers from the fact that under the present law it is not possible to use “cost or market, whichever lower” with lifo inventories and that if prices were to decline below those as of January 31, 1941, as of which date this method is to be adopted, it is possible that the companies would pay taxes on total income over a period of years which would be higher than the income determined on the inventory method previously employed. The decision was reached by Mr. Gimbel and you to take this risk.

Thereafter, these documents were properly signed and filed. No one from Touche, Niven and Company advised plaintiffs that these documents had to be filed by any specific date.

Touche, Niven and Company, now known as Touche, Boss, Bailey and Smart, have been auditors for Gimbels and its associates since 1922.

18. (a) On or about March 31, 1943, each plaintiff filed with a Collector of Internal Revenue a Treasury Department Form 970 (Kevised January 1943), entitled “Application For the Adoption and Use of the Elective Inventory-Method Provided by Section 22(d) of the Internal Revenue Code.” Form 970 provided in pertinent part that the applicant made:

* * * application to adopt and use the elective inventory method provided by section 22(d) of the Internal Revenue Code and to have such method first applied as of the close of the taxpayer’s taxable year ending Jan. 31,1942 * * *.

(b) The printed “Instructions” on said Form 970 stated in part:

1. This form is to be used by taxpayers making application for the adoption and use of the elective inventory method provided by section 22(d) of the Internal Revenue Code.
2. The taxpayer shall state the taxable year as of the close of which the method provided by section 22(d) of the Internal Revenue Code is first to be applied, and shall specify with particularity the goods to which it is to be applied.
3. The taxpayer may not change to the method of taking inventories provided by section 22(d) of the Internal Revenue Code unless he agrees to and makes 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 of Internal Revenue 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.
4. An election made under section 22(d) of the Internal Revenue Code is irrevocable by the taxpayer and the method once adopted shall be used in all subsequent taxable years, unless the use of another method is required by the Commissioner of Internal Revenue, or authorized by him pursuant to a written application therefor filed with him as provided in section 19.41-2 of the regulations.
5. A separate form shall be used by each person making application and shall be executed in triplicate. Such form in triplicate shall be attached to and filed with the taxpayer’s return for the taxable year as of the close of which the method provided for in section 22(d) of the Internal Revenue Code is first to be used.
6. There should be attached to the application 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 inventory method is proposed first to be used, and also as of the beginning of the preceding taxable year. * * *

(c) Attached to each of the Forms 970 was an analysis of the respective plaintiff’s inventories for each of the taxable years ended January 31, 1940, 1941, and 1942. The analyses showed the inventories for fiscal 1940 and 1941 valued on the FIFO basis, and the inventories for fiscal 1942 valued alternatively on both the FIFO and LIFO bases. The LIFO computations were based upon the price indices prepared by the National Industrial Conference Board.

19. In 1942 and 1943 (and continuously thereafter until 1948), the Treasury Department and the Bureau of Internal Revenue took the position that since Section 22(d) (1) of the Code referred to the LIFO method of “inventorying goods specified in the application,” LIFO was available only to taxpayers who applied the method to the cost of specific inventory items and that it was not, therefore, available to taxpayers who applied the method to a total department inventory recorded by dollar totals at retail and at cost. For this reason such agencies held that LIFO was not available for use in computing the income of retail stores, such as plaintiffs’, which applied LIFO to the total inventory for each store department, such inventory being stated in terms of department dollar total values in accordance with the retail inventory method, and not by specific items. The Treasury Department regulation, promulgated under Section 22 (d) of the Internal Revenue Code, made no provision for retailers to use LIFO and made no provision for the employment of retail price index figures to apply LIFO in connection with the retail inventory method.

20. In preparation for a meeting of the Board of Directors of Gimbels to be held on April 20,1943, to approve the An-aual .Report of the Company to its stockholders for the fiscal year ended January 31,1943, plaintiffs’ auditors, on April 15, 1943, prepared a draft of plaintiffs’ financial statements for fiscal 1943 on the basis of a continued employment of LIFO with the use of a retail price index prepared by the National Industrial Conference Board. Said draft included a detailed calculation of the differing results obtained by the use of LIFO as contrasted with the former basis. Footnote 1 to the proposed financial statements was as follows:

GIMBEL BROTHERS, INC. AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS
(First draft — subject to adjustment)
1. As explained in the report for the year ended January 31, 1942, the last-in first-out (lifo) method of determining inventory cost was adopted in the preparation of the report for that year; such method is, based upon an index of retail price changes which has been prepared by the National Industrial Conference Board. The lifo method was continued for the year ended January 31, 1943. The effect upon the net profit for the past two years has been as follows:
The use of the lifo method based upon an index of retail price changes is subject to the approval of the taxing authorities. If the use of this method is not ultimately approved, the taxable income would be increased by the aforementioned reduction of merchandise inventories of $2,469,460.26 and the deduction from net profit for federal taxes on income would be increased by the aforementioned reduction in taxes of $1,797,000.00.
A comparison of tbe net profit for tbe past two years on tbe lifo basis and on tbe basis formerly employed is as follows:

21. (a) On April 20, 1943, a meeting of the Board of Directors of Gimbels was held for tbe indicated purpose. Mr. Friedman was present at that meeting and advised tbe Board that tbe Treasury Department and the Bureau of Internal Revenue were adamant in their position that retailers could not elect to adopt BIFO; that there were disadvantages to keeping the books on a LIFO basis and filing income tax returns on a FIFO basis since earnings would be completely distorted because LIFO would not only produce lower earnings but such earnings would be reduced by tbe accrual of income taxes computed on a FIFO basis; and that for these reasons many other department stores were reverting to FIFO.

(b) Tbe Board thereupon decided, in view of the considerations set forth by Mr. Friedman, to abandon LIFO and to revert to FIFO. The other plaintiffs also so decided. Consequently plaintiffs also decided to withdraw their respective elections to adopt LIFO commencing fiscal 1942 (which 'had not as yet been acted upon), as well as their refund claims predicated upon such elections.

22. (a) On April 24,1943, the Annual Report of Gimbels and its subsidiary companies for the fiscal year ended January 31,1943, was issued to stockholders. The financial statements contained therein were based on the inventories being valued on the basis of cost or market, whichever was lower, on the retail inventory method with the use of FIFO. Annual Reports for that fiscal year prepared on the same basis were also filed with the Securities and Exchange Commission and with the New York Stock Exchange.

(b) Said Annual Report contained the following paragraph over the signature of Gimbels’ president:

Merchandise inventories at January 31, 1943 aggregated $24,101,609. compared with $19,677,035. a year ago, an increase of $4,424,574. As was explained in the Annual Report for the year ended January 31,1942, the “last-in first-out” (LIFO) method of determining inventory costs, based upon an index of retail price changes, was adopted for the year covered by the report. It was there pointed out that while such “last-in first-out” method might not be used for tax purposes under the then existing provisions of the tax laws, there was reason to believe that retroactive legislation might be enacted permitting such use. Legislation subsequently enacted was only part of that contemplated at the time the report was issued. It has been determined, therefore, to abandon the “last-in first-out” method of inventories and to return to the method formerly in use, and to adjust the figures for the year ended January 31, 1942 accordingly. This has resulted in an adjustment increasing the net profits for the year ended January 31, 1942 by $556,469. Of such increased net profits it has been deemed advisable to transfer $500,000 to a reserve for post-war contingencies. The balance has been added to earned surplus. The comparative figures for the year ended January 31, 1942 above set forth have been adjusted so as to present them as if the “last-in first-out” method of inventory had not been in use during that year.

(c) In the report the comparativé figures for fiscal 1942 were adjusted so as to eliminate the effect of LIFO. Said adjustment increased profits for fiscal 1942 by $556,469. Of this amount plaintiffs transferred, as set forth in the president’s statement, $500,000 to an account called “reserve for post-war contingencies.” On the “Liabilities” side of the “Comparative Consolidated Balance Sheet,” there was set up under the heading “Reserves,” a reserve “For post-war contingencies (See Note 1)” in the amount of $500,000 as of both January 31,1942, and January 31,1943 (two other reserves also being set forth under such “Reserves” heading, i.e., one “For possible assessment of Taxes for prior years” and the other “For insurance”), and on the profit and loss statement, there was, after the calculation of the “Net Profit” figure for fiscal 1942 of $3,730,805.69, deducted said $500,000 as a “Provision For Post-War Contingencies (See Note 1),” leaving the amount of $3,230,805.69 as the “Balance to accompanying statement of surplus.” There was no such comparable “provision,” or amount transferred to such reserve fund, for fiscal 1943. Said amount of $3,230,805.69 was then added to the “Earned Surplus” account for fiscal 1942, in the “Surplus” statement included in the report.

(d) The above-referred-to Note 1 to the financial statements was as follows:

In the report for the year ended January 31, 1942 it was explained:
that the last-in first-out (lifo) method of determining inventory cost based upon an index of retail price changes was adopted in the preparation of the report for that year,
that the use of such method for that year resulted in a reduction of $556,469.26 in the net profits, and
that while the last-in first-out (lifo) method might not be used by Gimbel Brothers, Inc. and subsidiary companies for tax purposes under the existing provisions of the tax laws, there was reason to believe that retroactive legislation might be enacted permitting its use for the year covered by the report but that if adequate retroactive legislation were not enacted, taxable income and taxes would be increased.
The legislation thereafter enacted was only in part of the kind contemplated at the time the report for the year ended January 31, 1942 was issued. It has been decided therefore:
■to abandon the last-in first-out (lifo) method of inventories, to return to the method formerly in use, and to adjust the figures as at January 31,1942 and for the year then ended accordingly, and
to^ transfer $500,000.00 of the $556,469.26 resultant increase in net profits for the year ended January 31, 1942 to a reserve for post-war contingencies and the balance of $56,469.26 to earned surplus.
In addition, Note 2 stated:
The comparative figures as of January 31, 1942 and for the year then ended have 'been adjusted so as to present the figures as if the last-in first-out (lifo) method of inventory (See Note 1) had not been in use during that year.

The auditors also certified in their opinion letter included in the report that the financial statements set forth therein “present fairly the consolidated position of Gimbel Brothers, Inc. and subsidiary companies at January 31, 1943 and the consolidated results of their operations for the fiscal year, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year, except for the changes in accounting policy, which we approve, explained in Note[s] 1 * *

23. (a) On April 26, 1943, Gimbel Brothers, Inc., sent the following letter to the Collector of Internal Revenue at New York City:

Under date of March 31, 1943, we filed claims for refund as a result of the change of inventory method and at the same time made applications for permission to change inventory method. Such claims are listed below:
This is to advise you that we desire to withdraw these claims for refund and applications for change in inventory method.

(b) No response was received from the Collector of Internal Revenue at New York to said letter of April 26,1943.

24. (a) On April 28, 1943, Ivaufmann and Baer sent the following letter to the Collector at Pittsburgh, Pennsylvania:

Under date of March 30, 1943, we filed claim for refund for the Kaufmann and Baer Company in the amount of $106,287.97, as a result of the change of inventory method and at the same time made application for permission to change inventory method.
This is to advise you that we desire to withdraw this claim for refund and our application for change in inventory method.

(b) The Collector replied in a letter addressed to Kauf-mann and Baer on April 30,1943, stating that the claim for refund had been forwarded to the Office of the Commissioner of Internal Revenue in Washington, D.C. The reply in part stated, “This office suggests that you advise that office of your intention.”

(e) Thereupon, on May 5,1943, Kaufmann and Baer sent a letter to the Commissioner of Internal Revenue in Washington, reading as follows:

Under date of March 30,1943, we filed with the Collector of Internal Revenue at Pittsburgh, Pennsylvania, a claim for refund for Kaufmann and Baer Company in the amount of $106,287.97 as a result of the change of inventory method, and at the same time made application for permission to change our inventory method to a LIFO basis.
We attach hereto copy of the letter from the Collector of the 23rd District of Pennsylvania, stating that the claim was forwarded to the Office of the Commissioner under date of April 17,1943.
Accordingly, we wish to advise you that we desire to withdraw this claim for refund and also to withdraw, or cancel, our application for a change in our inventory method.

(d) On May 27,1943, a letter was addressed by a Deputy Commissioner to Kaufmann and Baer, reading as follows:

Reference is made to your letter dated May 5, 1943, relative to your claim for refund of income tax in the •amount of $106,287.97, for the fiscal year ended January 81, 1942.
Your case is being forwarded to the Internal Revenue Agent in Charge, 2300 Farmers Bank Building, Pittsburgh, Pennsylvania, for investigation. You will be further advised by that official relative to the matter.

25. (a) Plaintiffs did, on or about August 13,1943, for the taxable year ended January 31,1943, on or about October 13, 1944, for the taxable year ended J anuary 31,1944, on or about October 11, 1945, for the taxable year ended January 31, 1945, and on or about August 14, 1946, for the taxable year ended January 31, 1946, file with the then Collector of Internal Revenue for the Third Collection District of New York, a consolidated corporation income and declared value excess profits tax return (Form 1120) and a consolidated corporation excess profits tax return (Form 1121) in which their inventories of goods were valued on the basis of cost or market, whichever was lower, as determined on the retail inventory method employing FIFO.

There was neither attached to nor filed with plaintiffs’ consolidated tax return for the taxable year ended January 31, 1943, or for any of the other returns for the years mentioned, an election to adopt the LIFO (elective) method of inventory valuation.

(b) The total income, declared value excess profits, and excess profits taxes shown on their consolidated returns and paid or credited on behalf of the affiliated group for the fiscal years ended January 31,1943, through January 31,1946, were as follows:

Fiscal Year: Amount
1943 _ $ 5, 647,450. 89
1944 _ 4, 413,583.10
1945 _ 1946 _ 14,131, 540. 73 16,164, 507. 61

26. The Annual Reports of Gimbel Brothers, Inc., and subsidiary companies (which included the results of operations of each plaintiff herein) for each of the fiscal years ended J anuary 31,1944,1945,1946, and 1947 contained inventories valued on the basis of cost or market, whichever was lower, as determined on the retail inventory method employing FIFO (as did plaintiffs’ consolidated federal tax returns for these years). These Annual Reports were distributed to the stockholders of Gimbels, the Securities and Exchange Commission, and the New York Stock Exchange.

27. (a) On April 15, 1942, Hutzler Brothers Company, which operated a retail department store in Baltimore, Maryland, filed a timely federal income tax return for its fiscal year ended January 31, 1942. During that fiscal year the company had issued no interim reports to creditors or stockholders. Its annual report to shareholders for that fiscal year contained inventories valued on the LIFO basis. Attached to said income tax return was a Form 970 (Kevised) application to adopt the LIFO method beginning with the fiscal year ended January 31, 1942.

(b) On February 5,1944, the Bureau of Internal Revenue issued a deficiency notice to Hutzler Brothers Company with respect to said fiscal year which in effect disapproved the adoption and use by the company of LIFO. However, on January 14, 1947, the Tax Court of the United States in Hutzler Brothers Co., 8 T.C. 14, decided hr favor of the company’s adoption and use of LIFO by employment of retail price figures in connection with the retail inventory method for its taxable year ended January 31, 1942, and thereafter the Treasury Department and the Bureau of Internal Revenue agreed that LIFO was available for use in determining the income of retail department stores by application of the method to the total inventory for each department (stated in terms of dollar values determined by the retail inventory method). On March 9, 1948 (in T.D. 5605, 1948-1 Cum. Bull. 16), the Treasury Regulations were amended “in order to adapt the retail inventory requirements of the regulations to the elective inventory principle of Section 22(d) of the Internal Revenue Code as enunciated by the” Tax Court in the Hutzler Brothers decision. In addition, on that date price indices prepared by the Bureau of Labor Statistics of the Department of Labor to be used by department stores employing the retail and elective inventory methods were announced in I.T. 3904 (1948-1 Cum. Bull. 18).

(e) In said Form 970, Hutzler Brothers Company, in valuing its inventories under the LIFO method, used indices that had been prepared by the National Industrial Conference Board which differed from those prepared thereafter by the Bureau of Labor Statistics. See I.T. 3904, 1948-1 Cum. Bull. 18. The Internal Kevenue Service (following the Tax Court’s decision) has recognized said Form 970 as effective and has allowed the company to use LIFO beginning with said taxable year ended January 31,1942. However, the Commissioner of Internal Revenue adjusted the figures set forth in said Form 970 by using the indices prepared by the Bureau of Labor Statistics to value the company’s inventories. See I.T. 3904, supra. The parties herein have stipulated that the court may take judicial notice of the decision, findings of fact, and opinion in Hutzler Brothers Co., supra.

28. (a) A meeting of the Board of Directors of Gimbels was held on February 24, 1948. At that meeting, the Board discussed the Hutzler decision and the fact that the Treasury Department had apparently determined to acquiesce therein. It was then decided that plaintiffs would restate earnings to stockholders for the preceding fiscal years 1942-1947 on a LIFO basis computed in accordance with the then to be announced, but anticipated, T.D. 5605 and that refund claims would be filed for all of the fiscal years ended in 1943 to 1947, inclusive. This reinstatement was based on a LIFO election beginning with the fiscal year ended January 31, 1942, and therefore the cost of the inventories was determined as of February 1,1941.

(b) A subsequent meeting of the Board was held on April 20, 1948, at which Mr. Friedman was present. At that meeting Mr. Friedman had with him statements prepared by Touche, Niven showing the earnings of plaintiffs recast, as aforementioned, for the preceding years on the basis of both LIFO and FIFO since the Board determined that the Gim-bels stockholders should have full and complete information with respect to the procedures which were being adopted. At that meeting, the Board decided to make the fiscal 1948 Annual Report to the stockholders on the LIFO basis, to restate earnings and inventories on said LIFO basis for the fiscal years 1942 through 1947, and to file tax returns on the LIFO basis.

29. (a) On May 27, 1948, Gimbels issued its Annual Report to stockholders for the fiscal year ended January 31, 1948. In said report, the inventories were stated on a LIFO basis for the fiscal year ended Jamiary 31,1948, and restated on a LIFO basis for the fiscal years ended January 31,1942, to January 31,1947, inclusive. All of these LIFO figures were based on an election beginning wth the fiscal year ended January 31, 1942, with the cost of the inventories being determined as of February 1, 1941. Its federal income tax return for the fiscal year ended January 31, 1948, was also filed on a LIFO basis.

(b) Said Annual Beport contained the following paragraph over the president’s signature:

Becently the Treasury Department acquiesced in a court decision making the last-in first-out (LIFO) inventory method available to retailers. Begulations issued for its use, however, limited this right to taxpayers who had filed tax returns on the LIFO basis and had issued reports to stockholders continually on that basis. The LIFO method was adopted by the Company in its report for the year ended January 31, 1942 but was abandoned for subsequent years because the Bureau of Internal Bev-enue had concluded that the use of the LIFO basis was not available to taxpayers whose inventory records were kept on the basis of retail inventory method. Thus the new regulations still leave at a disadvantage many retail companies including your Company. Accordingly, representations have been made by your Company and a number of other companies to have the Treasury Department extend the right to use the LIFO basis of inventory for tax purposes commencing with the year January 31, 1942 when it was first adopted.

(c) The following are excerpts from'the auditors’ footnote 1 to the financial statements contained in the report:

During the year ended January 31, 1942, the companies adopted the last-in first-out (LIFO) inventory basis. Because the Bureau of Internal Bevenue concluded that the use of the LIFO basis was not available to taxpayers whose inventory records were kept on the basis of the retail inventory method, the companies abandoned that method for subsequent years. On January 14,1947, the Tax Court of the United States, in a test case brought by another taxpayer, decided that retail stores may use the LIFO method. In March, 1948, the Treasury Department acquiesced in this decision by issuing regulations for the use by retailers of such method; however, those regulations limited its use to those taxpayers who had filed tax returns on that basis and had issued reports to stockholders continuously on that basis.
This places at a disadvantage taxpayers who have followed the Treasury Department rulings. Representations have been made to the Treasury Department and a revision of the regulations is now under discussion which, if promulgated, would allow the companies to use the LIFO basis of inventories for tax purposes commencing with the year ended January 31,1942 when it was first adopted. In order to qualify for the use of the LIFO basis, the law provides that reports to stockholders must be prepared on that basis; thus, while ordinarily the adjustment of the books would not be made until approval of the LIFO basis by the taxing authorities, in view of the requirement of the law, adjustment of the books has been made at this time. The income and the taxes for the years ended January 31,1942 to 1947 have 'been restated to the LIFO basis and the income for the year ended January 31, 1948 has been determined on that basis; in making the revisions, reserves previously provided for war and post-war contingencies and for inventories and contingencies have been eliminated. The net effect of this restatement is summarized as follows:
Reduction in Year ended January 31 Net profit as net profit as Net profit published ** a result of as adjusted LIFO $3,730,806 * $324,291 $4,055,097 3,347,770 264,745 3,083,025 4,168,104 205,777 3,962,327 5,086,825 356,380 4,730,445 6,749,284 545,437 6,203,847 16,418,851 1,624,049 13,794,802 1942. 1943. 1944. 1945. 1946. 1947.

(d) The following paragraph appeared in the opinion letter of the auditors (Touche, Niven and Company) which was part of said Annual Beport:

A change in accounting policy was made during the year in the readoption of the last-in first-out (LIFO) inventory basis; this change, which has our approval, is explained in Note 1 to the financial statements.

30. On or about December 9,1948, plaintiffs filed with the then Collector of Internal Bevenue for the Third Collection District of New York claims for refund (Forms 843) of income, declared value excess profits, and excess profits taxes (as the case may be) paid by them for the taxable years ended January 31, 1943, 1944, 1945, and 1946, based on a LIFO election beginning with the fiscal year ended January 31,1942, and therefore determining the cost of the inventories as of February 1, 1941.

31. On June 6,1953, a meeting was held attended by plaintiffs’ executives and their attorney; Kenneth Gemmill of the Treasury Department; Charles Davis, Chief Counsel of the Bureau of Internal Bevenue; and about 15 other representatives of the Bureau. At that meeting, the representatives of the Bureau stated that they had come to the conclusion that plaintiffs’ claims for refunds for the fiscal years ended in 1942 through 1947 would not be allowed because their Form 970 elections had not been filed within the time required by T.D. 5199 and, furthermore, the elections had been withdrawn. This was the first time that these objections had been raised with plaintiffs by either the Treasury Department or the Bureau of Internal Bevenue.

32. On June 15,1942, Ed. Schuster & Co., Inc. (since April 1962 a wholly-owned subsidiary of Gimbels), which operated a retail department store in Milwaukee, Wisconsin, filed a timely federal income tax return for its fiscal year ended January 31,1942. During that fiscal year, Ed. Schuster & Co., Inc., had issued an interim report to creditors which contained inventories valued on a basis other than LIFO. Its Annual Beport to shareholders for that fiscal year contained inventories valued on the LIFO basis. Attached to said income tax return was a Form 970 (Revised) application to adopt the LIFO method beginning with the fiscal year ended January 31,1942. In said Form 970, in valuing its inventories under the LIFO method, Ed. Schuster & Co., Inc., used in-dices it had prepared which differed from the indices prepared thereafter by the Bureau of Labor Statistics (see I.T. 3904,1948-1 Cum. Bull. 18) but which were much like those prepared by the National Industrial Conference Board. The Internal Revenue Service has recognized said Form 970 as effective and has allowed Ed. Schuster & Co., Inc., to use LIFO beginning with said taxable year ended January 31, 1942. However, the Commissioner of Internal Revenue has adjusted the figures set forth in said Form 970 by using the indices prepared by the Bureau of Labor Statistics to value the inventories of Ed. Schuster & Co., Inc. (See I.T. 3904, supra.)

33. The statutory periods within which any assessment could be made in connection with plaintiffs’ liabilities for income, declared value excess profits, or excess profits taxes for the taxable years ended January 31, 1943, 1944, 1945 and 1946, were extended from time to time by the execution of written consents, as the result of which, under Section 322 (b) of the Internal Revenue Code of 1939, the statutory periods within which any claim for refund of any of said taxes paid for said taxable years could be filed were extended to December 30, 1948, December 30, 1949, December 30, 1959, and December 80,1959, respectively.

34. By certified letters dated November 10, and November 17, 1959, and November 25, 1960, the then District Director of Internal Revenue at New York City disallowed in full plaintiffs’ claims for refund of taxes paid for the fiscal years ended J anuary 31,1943, through J anuary 31,1946, inclusive.

35. Following such disallowances the petitions herein were filed within the period allowed by law for the commencement of these actions.

36. No action other than as aforesaid has been had on these claims in Congress or before any department of the United States. Plaintiffs are the true and lawful owners of the claims sued upon and have not transferred or assigned the same or any part thereof except transfers in connection with dissolu-tions or mergers and transfers by one member of the affiliated group to another.

37. The question of whether plaintiff Kaufmann and Baer Company’s claim for refund of taxes for the fiscal year ended January 31,1942, which was based upon its purported election to adopt the LIFO method of inventorying its goods beginning with that fiscal year, should be allowed, was litigated before this court and the decision rendered is reported in Kaufmann and Baer Company and Gimbel Brothers, Inc. v. United States, 133 Ct. Cl. 510, 137 F. Supp. 725, cert. denied, 352 U.S. 835 (1956). After having previously stipulated that the evidence in the Kaufmann and Baer Co. case was equally applicable to them, plaintiffs Gimbel Brothers, Inc., and Saks & Company dismissed their then pending suits in this court (Docket Numbers 48248 and 48252, Gimbel Brothers, Inc.; Docket Numbers 48081 and 48249, Saks & Company) based on the Kaufmann and Baer Co. decision.

38. The parties have stipulated that, in the event the court determines that plaintiffs are entitled to use the LIFO method of valuing inventories for any one or more of the taxable years here involved, it then will become necessary for the court also to determine as a matter of law whether the cost of plaintiffs’ inventories as at February 1,1941, or February 1, 1942, or some other appropriate date (i.e., “base-year cost”) is to be used in determining the price level fluctuations in relation to the “base-year cost” for the years plaintiffs may use LIFO. With the consent of the commissioner, the parties have reserved for subsequent submission, if necessary and appropriate following the determination of the primary issue of whether plaintiffs are entitled to use LIFO, proof of the amounts of their inventories as at appropriate dates.

39. Pursuant to the parties’ agreement, the commissioner, by order dated March 25, 1965, severed and reserved for a possible subsequent determination a secondary issue (i.e., whether plaintiffs are entitled to apply the involuntary liquidation and replacement provisions of Section 22(d) (6) of the 1939 Code), which issue may be resolved by the deter-ruination of the primary issue (i.e., whether plaintiffs are entitled to use LIFO).

CONCLUSION OK LAW

Upon the foregoing findings of fact and opinion, which are adopted by the court and made a part of the judgment herein, the court concludes that the petitions herein, insofar as they assert claims based upon plaintiffs’ right to use the LIFO method of inventory valuation for their fiscal years 1943,1944,1945 and 1946, are dismissed. 
      
       Gimbel Brothers, Inc. (plaintiff No. 1 in both petitions), a New York corporation operating a nationwide network of department and specialty stores, is the common parent of an affiliated group of corporations which filed consolidated tax returns under Section 141 of the Code. Therefore, all the members of the group are parties plaintiff. However, plaintiffs Gimbels, Saks & Company, and Kaufmann and Baer Company, were the only members of the group (the “merchandising members”) for which inventories were an income-determining factor. Accordingly, the term “plaintiffs” will, unless otherwise specifically designated, be used herein as referring only to such three members of the group.
     
      
       Actually, only Kaufmann and Baer’s case was litigated, but the facts In the similar suits filed by Gimbel Brothers, Inc., and Saks Sc Company were Identical. It was stipulated that the evidence In Kaujmann and Baer was equally applicable to the other two and, following the ultimate disposition of Kaujmann and Baer, and on the basis thereof, they dismissed their suits.
     
      
       Defendant’s motion for summary judgment was, on November 16, 1964, denied without prejudice. Its motion for reconsideration was denied on January 22, 1965.
     
      
       unless the base stock should become depleted, In which case the Involuntary liquidation and replacement provisions of Section 22 (d) (6) (A) (B) and (C) of the Code (added by the Revenue Act of 1042) come Into play.
     
      
       For tax purposes, the value of a LUTO Inventory cannot be reduced below Its cost (Sections 22(d) (1) (A), 22(d) (4)) whereas a FIFO Inventory Is based on the lower of cost or market. Thus, during a period of declining market prices, a LIFO inventory may be valued higher than market or replacement cost, under Section 22(d) (4), a taxpayer who previously used the lower of cost or market method would thus be required, if any valuation had been based on lower market, to increase his ending Inventory for the prior year to cost. This would result, of course, in his being required to pay an additional tax on the previous write-down of his inventory to the lower market level.
     
      
       I.T. 3456, 1941-1 Cum. Bull. 201, does not hold, as plaintiffs contend, that “two divisible things” were Involved In a Form 970 LIFO election, i.e., (1) the election to use LIFO, and (2) the selection, as “a separate matter,” of the first year to which the method was to be applied. (Plaintiffs’ Brief to the Commissioner, pp. 54-55.) AI1 that was there held was that where, on a LIFO application, a correct reflection of income required an adjustment for a prior year for which additional taxes were barred by the statute of limitations, and the taxpayer refuses to waive the statutory bar, “approval of the change to the elective method may be withheld and not granted except for a subsequent year.” (I.T. 3456, supra, at 204.) This holding, which merely concerns conditions for approval by the Commissioner, cannot be Interpreted to mean that an application to commence LIFO with one year automatically compels its commencement in the next succeeding year if the first year selected for some reason is not eligible for such selection. Clearly, In the instance referred to In I.T. 3456, the taxpayer would not be obliged to accept the conditions specified for the Commissioner’s approval, and could continue with the FIFO method.
     
      
       Such Code section provides:
      “Ií a taxpayer, Raving complied with paragrapR (2), uses tRe metRod described In paragrapR (1) for any taxable year, then such metRod shall be used In all subsequent taxable years unless—
      (A) With the approval of the Commissioner a change to a different metRod is authorized; * * *”
      ,TRe regulation provides:
      
        ‘‘Revocation of election. — An election made to adopt and use the elective inventory metRod is irrevocable, and the metRod once adopted shall be used in all subsequent taxable years, unless the use of another metRod be required by the Commissioner, or authorized by him pursuant to a written application therefor filed with Rim * *
      Instruction 4 on Form 970 repeated the regulation provision in substantially verbatim form.
      TRe pertinent regulations Rave sometimes been referred to herein by the parties as Regulations 111 issued under the 1939 Code. However, at the time plaintiffs filed their statements of election on March 31, 1943, the applicable regulations then in effect were Regulations 103, promulgated January 29, 1940. Regulations 111 were not promulgated until October 26, 1943. In any event, in all respects herein applicable they are substantially identical.
     
      
       Nor could plaintiffs have possibly thought that the Commissioner had any Interest In Imposing LIFO on them since he was then maintaining (erroneously, to be sure, as subsequently held in Hutzler, supra) that retailers such as plaintiffs were not entitled to use LIFO. That plaintiffs capitulated to such position instead of contesting it, as did Hutzler, does not Improve their situation. As the court stated in Kaufmann and Baer, supra, at 518: “The Commissioner’s failure to act on the election to use LIFO did not prejudice plaintiff. It could have sought action by the Commissioner or from the courts if It desired. Instead of pursuing Its legal remedies plaintiff sought to withdraw Its claim for refund and its election."
     
      
       The pertinent portions of Section 22 (d) read as follows:
      “(1) A taxpayer may use the following method (whether or not such method has been prescribed under subsection (c)) in inventorying goods specified in the application required under paragraph (2) :
      :(A) Inventory them at cost;
      (B) Treat those 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) to the extent thereof, and second, those acquired In the taxable year; and
      (C) Treat those included In the opening inventory 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.
      (2) The method described in paragraph (1) may be used—
      (A) Only In inventorying goods (required under subsection (c) to be inventoried) specified In an application to use such method filed at such time and in such manner as the Commissioner may prescribe; and
      (B) Only if the taxpayer establishes to the satisfaction of the Commissioner that the taxpayer has used no procedure other than that specified in subpara-graphs (B) and (C) of paragraph (1) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method described in paragraph (1) is to be used, for the purpose of a report or statement covering such taxable year (i) to shareholders, partners, or other proprietors, or to beneficiaries, or (ii) for credit purposes. * * *
      (5) If a taxpayer, having complied with paragraph (2), uses the method described in paragraph (1) for any taxable year, then such method shall be used in all subsequent taxable years unless—
      (A) With the approval of the Commissioner a change to a different method is authorized; or
      (B) The Commissioner determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in subpara-graph (B) or paragraph (1) in inventorying the goods specified in the application to ascertain the income, profit, or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year (i) to shareholders, partners, or other proprietors, or beneficiaries, or (ii) for credit purposes ; and requires a change to a method different from that prescribed in paragraph (1) beginning with such subsequent taxable year or any taxable year thereafter. * * *”
      
     
      
       In the case under consideration in Eev. Ruling 60-244, involving cut timber, the taxpayer inventoried the timber at fair market value (by itself impermissible under LIFO) but then, by an “inventory reserve,” brought the value down to the cost basis (a LIFO requirement). The Ruling specifically pointed out that the “reserve” in question “is shown on the balance sheet as a deduction from inventories, but is not an allowable deduction for Federal income tax purposes.” Because the Commissioner concluded “the net effect of such treatment is to reflect, in the inventory of the timber cut * * * on the financial statements and credit reports, the adjusted cost basis of such timber,” he considered that such treatment of the inventory was consistent with the LIFO provisions of the Code.
     
      
       As the report stated:
      “Recently the Treasury Department acquiesced in a court decision making the last-in first-out (LIFO) inventory method available to retailers. Regulations issued for its use, however, limited this right to taxpayers who had filed tax returns on the LIFO basis and had issued reports to stockholders continually on that basis. The LIFO method was adopted by the Company in its report for the year ended January 31, 1942, but was abandoned for subsequent years because the Bureau of Internal Revenue had concluded that the use of the LIFO basis was not available to taxpayers whose inventory records were kept on the basis of retail inventory method. Thus the new regulations still leave at a disadvantage many retail companies including your Company. Accordingly, representations have been made by your Company and a number of other companies to have the Treasury Department extend the right to use the LIFO basis of inventory for tax purposes commencing with the year January 31, 1942, when it was first adopted.
      Ordinarily the books of your Company would not be adjusted until approval of the LIFO basis by the taxing authorities, but in view of the requirement of the law that reports to stockholders be prepared on the LIFO basis in order to qualify for use of LIFO, the income and the taxes for the years ended January 31, 1942 to 1947, have been restated to the LIFO basis and the income for the year ended January 81, 1948, has been determined accordingly.
      *****
      For the year ended January 31, 1948, net profits of the Company on the basis of the inventory method formerly in use would have been $8,691,504., equal after preferred dividends to $4.06 a share on the 1,954,600 shares of common stock outstanding at the end of the year. However, on the basis of the LIFO adjustment as presented in the report submitted herewith, earnings for the fiscal year ended January 31, 1948, are reported at $6,221,912, equivalent after preferred dividends to $2.80 per share on the common stock.
      The following figures summarize the sales and profits of the Company and its subsidiaries over the past seven years on the former basis and as revised to give effect to the LIFO basis:
      *****
      Comparative figures on value of inventories on the LIFO basis and the method formerly used are as follows : * * *”
     
      
       This is tie principal issue involved in the ease. With the consent of the commissioner, there is a severance of the issues, there being reserved for later submission, if necessary, questions arising under the involuntary conversion features of the 1939 Code.
     
      
       Mr. Friedman was a partner oí plaintiffs’ independent auditors, Touelie, Niven and Company.
     
      
       underlined matter added by T.D. 5199, which struck out the phrase “4959, approved December 28, 1939” which appeared where “5199” was added, and struck out the phrase “the expiration of such ninetieth day" which appeared where “such date” was added.
     
      
       Underlined portion typed In by plaintiff.
     
      
       Contra.
     
      
       This is the net profit before appropriation for inventories and war and post-war contingencies.
     
      
       Contra:
     