AMT inventory adjustments on change from LIFO to FIFO.

• Author: Burlas, David M.
• Position: Alternative minimum tax

Facts

A calendar-year C corporation (C) had been on the LIFO inventory method through 1993. C obtained IRS consent to change to the FIFO method for 1994. C's Sec. 481(a) positive adjustment, for regular tax purposes, was $660,000, which must be reported ratably over six tax years, beginning in 1994, as additional taxable income.

C's Sec. 481(a) positive adjustment, for alternative minimum tax (AMT) purposes, was an additional $66,000 - for a total AMT adjustment of $726,000.

C's 1994 taxable income, for both regular tax and AMT purposes, is $1 million - before any Sec. 481(a) adjustments.

Query

How should this change from LIFO to FIFO be treated for AMT purposes?

Pre-adjustment AMTI

Congress intended that the regular tax and the AMT "constitute separate and parallel tax systems." (See the General Explanation of the Tax Reform Act of 1986, at 472.) Therefore, C's Sec. 481(a) adjustment for AMT purposes also must be reported ratably over six years, beginning in 1994, as additional alternative minimum taxable income (AMTI) before the adjusted current earnings (ACE) adjustment. Consequently, the following computations are required for 1994:

Taxable income for regular tax before Sec. 481(a) adjustment $1,000,000 Regular tax Sec. 481 (a) adjustment 110,000 Taxable income for regular tax 1,110,000 Additional Sec. 481(a) AMT adjustment 11,000 Pre-adjustment AMTI $1,121,000 ACE adjustment

Under Regs. Sec. 1.56(g)-l(f)(3)(i), ACE is increased or decreased by the...