Proposed Regs Address IPIC Pooling for Dollar-Value LIFO Method of Accounting

(Parker Tax Publishing December 2016)

The IRS has issued proposed regulations relating to the establishment of dollar-value last-in, first out (LIFO) inventory pools by taxpayers that use the inventory price index computation (IPIC) pooling method. The regulations generally provide that a taxpayer whose trade or business consists of both manufacturing or processing activity and resale activity cannot commingle the manufactured or processed goods and the resale goods within the same IPIC pool. The regulations are effective when finalized. REG-125946-10 (11/28/16).

Background

Code Sec. 472 permits a taxpayer to account for inventories using the last-in, first-out (LIFO) method of accounting. The LIFO method of accounting for goods treats inventories on hand at the end of the year as consisting first of inventories on hand at the beginning of the year and then of inventories acquired during the year. Reg. Sec. 1.472-8(a) provides that taxpayers can elect to determine the cost of its LIFO inventories using the dollar-value method, under which cost is determined by using "base-year" costs expressed in terms of total dollars, rather than the quantity and price of specific goods as the unit of measurement. The "base-year" cost is the aggregate of the cost of all items in a "pool," which generally consists of groups of substantially similar items.

Any taxpayer that elects to use the dollar-value LIFO method to value LIFO inventories can also elect to use the inventory price index computation (IPIC) method to compute the base-year cost and determine the LIFO value of a dollar-value pool for a trade or business. Reg. Sec. 1.472-8(b)(4) governs the application of the IPIC pooling method to manufacturers and processors, while Reg. Sec. 1.472-8(c)(2) governs the application of the IPIC pooling method to wholesalers, retailers, jobbers, and distributors. For manufacturers and processors, IPIC pools may be established based on the 2-digit commodity codes in Table 9 of the Producer Price Index Detailed Report (PPI Detailed Report). For retailers, IPIC pools may be established based on either the general expenditure categories in Table 3 of the Consumer Price Index Detailed Report (CPI Detailed Report), or based on the 2-digit commodity codes in the PPI Detailed Report. Wholesalers, jobbers, or distributors using the IPIC pooling method can only use the 2-digit commodity codes to establish IPIC pools. In addition, a taxpayer establishing IPIC pools may combine IPIC pools that comprise less than 5 percent of the total inventory value of all dollar-value pools to form a single miscellaneous IPIC pool. If the resulting miscellaneous IPIC pool is less than 5 percent of the total inventory value of all dollar-value pools, the taxpayer may combine the miscellaneous IPIC pool with its largest IPIC pool.

The general pooling rules of Reg. Sec. 1.472-8(b) and (c) provide that where a taxpayer is engaged in both a manufacturing or processing activity and a wholesaling or retailing activity, separate pooling rules apply to the separate activities, and goods purchased for resale may not be included in the same pool as manufactured or purchased goods. On the other hand, the IPIC pooling rules address circumstances where a trade or business consists entirely of a manufacturing, processing, retailing, or wholesaling activity. According to the IRS, there is some confusion concerning how the IPIC pooling rules apply where a taxpayer is engaged in both a manufacturing or processing activity and a wholesaling or retailing activity. Accordingly, the IRS has issued proposed regulations to address the confusion.

Proposed Regs Clarify IPIC Pooling

The proposed regulations generally clarify that an IPIC-method taxpayer who elects the IPIC pooling method described in Reg. Sec. 1.472-8(b)(4) or (c)(2) and whose trade or business consists of both manufacturing or processing activity and resale activity may not commingle the manufactured or processed goods and the resale goods within the same IPIC pool.

Under the proposed regulations, a manufacturer or processor using the IPIC pooling method under Reg. Sec. 1.472-8(b)(4) that is also engaged, within the same trade or business, in wholesaling or retailing goods purchased from others can elect to establish dollar-value pools for the manufactured or processed items accounted for using the IPIC method based on the 2-digit commodity codes in the PPI Detailed Report. If the manufacturer or processor makes this election, the manufacturer or processor must also establish pools for its resale goods in accordance with Reg. Sec. 1.472-8(c)(2) (that is, based on the general expenditure categories in the case of a retailer or the 2-digit commodity codes in the case of a retailer, wholesaler, jobber, or distributor).

Similarly, a wholesaler, retailer, jobber, or distributor using the IPIC pooling method under Reg. Sec. 1.472-8(c)(2) that is also engaged, within the same trade or business, in manufacturing or processing activities can elect to establish dollar-value pools for the resale goods accounted for using the IPIC method in accordance with Reg. Sec. 1.472-8(c)(2) (that is, based on the general expenditure categories in the case of retailer or the 2-digit commodity codes in the case of a wholesaler, retailer, jobber, or distributor). If the wholesaler, retailer, jobber, or distributor makes this election, it must also establish pools for its manufactured or processed goods based on the 2-digit commodity codes.

If the taxpayer chooses to use the 5-percent method of pooling, the proposed regulations provide that resale IPIC pools of less than 5 percent of the total value of inventory can be combined to form a single miscellaneous IPIC pool of resale goods. The taxpayer can also combine the IPIC pools of manufactured or processed goods of less than 5 percent of the total value of inventory to form a single miscellaneous IPIC pool of manufactured or processed goods. If the resale miscellaneous IPIC pool or the manufacture or processed IPIC pool is less than 5 percent of the total value of inventory, the taxpayer can combine the miscellaneous IPIC pool with the largest resale IPIC pool, or the largest manufactured or processed pool, whichever is applicable. These miscellaneous IPIC pools cannot be combined with any other IPIC pool (that is, a pool of manufactured goods cannot be combined with a pool of resale goods, or vice versa).

Each of these 5-percent rules is a method of accounting, thus, a taxpayer cannot change to, or cease using, either 5-percent rule without obtaining the IRS's prior consent.

The regulations are proposed to be effective when finalized.

For a discussion of the dollar value LIFO method, see Parker Tax ¶242,320.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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