Final regs. simplify LIFO IPIC method.

• Author: Smith, Annette B.
• Position: Inventory price index computation

Final regulations issued earlier this year make major modifications to the inventory price index computation (IPIC) method of determining inventory values under the LIFO inventory method (Regs. Sec. 1.472-8). Generally, the changes simplify the IPIC method.

Under LIFO, for each inventory pool, a company must compute an inventory price index (IPI), which factors in inflation that has occurred since the LIFO base year. The IPIC method is an optional LIFO method designed to simplify the LIFO computation. It measures inflation based on indexes contained in the Consumer Price Index Detailed Report (CPI Detailed Report) or the Producer Price Index Detailed Report (PPI Detailed Report) published by the Bureau of Labor Statistics (BLS).

Impact of the Final Regs.

Reduction eliminated. The most significant change was to eliminate the requirement for large companies to reduce the IPI by 20%; accordingly, all taxpayers electing to use the IPIC method will be permitted to employ 100% of the IPI to compute the LIFO value of a dollar-value pool. To change to 100% IPI, taxpayers must use a cut-off method. Therefore, taxpayers that used 80% of the IPI under the prior IPIC regulations may not adjust prior years' indexes; the benefit of using 100% only applies prospectively.

Eligibility. The final regulations liberalize the IPIC-eligibility restrictions. Generally, a taxpayer using the IPIC method must use that method for all dollar-value LIFO inventory (within a single trade or business). However, a retailer that uses Department Store Inventory Price Indexes may elect to use the IPIC method for kerns that do not fall within any of the index's 23 department store major groups. Alternatively, retailers (including department stores) may elect to use the IPIC method for all dollar-value LIFO inventory (within a specific trade or business).

Special pooling rules. The most significant change in the IPIC pooling rules is a new method that allows manufacturers and processors to establish pools based on the PPI Detailed Report's major commodity codes. Manufacturers could now include manufactured goods and goods purchased for resale in the same pool(s) if the goods fit into the same two-digit commodity code. This method is an alternative to natural-business-unit (NBU) pooling, which would require manufacturers to use separate pools for goods manufactured and goods purchased for resale, even if the goods are identical otherwise. However, this method could result in...