26 U.S.C. § 471: General rule for inventories

Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. the taxpayer normally does a physical count of inventories at each location on a regular and consistent basis, and the taxpayer makes proper adjustments to such inventories and to its estimating methods to the extent such estimates are greater than or less than the actual shrinkage. subsection (a) shall not apply with respect to such taxpayer for such taxable year, and treats inventory as non-incidental materials and supplies, or conforms to such taxpayer’s method of accounting reflected in an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures. For purposes of this subsection, the term “applicable financial statement” has the meaning given the term in section 451(b)(3). In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary. For rules relating to capitalization of direct and indirect costs of property, see section 263A. such changes shall be treated as initiated by the taxpayer, such changes shall be treated as made with the consent of the Secretary of the Treasury, and the period for taking into account the adjustments under section 481 [ 26 U.S.C. 481 ] by reason of such change shall be 4 years.”