Inventory planning.

• Author: Godbout, James C.

In IRS Letter Ruling (TAM) 9129004, the taxpayer used the dollar-value LIFO method in valuing its inventories. In implementing the natural business unit (NBU) pooling method, the taxpayer established one NBU of all of its domestic product manufacturing and distribution for both tax and financial reporting purposes. An IRS agent challenged the use of this single NBU under Regs. Sec. 1.472-8(b)(2). The IRS National Office, after analyzing the criteria set forth in the regulations defining a natural business unit, concluded that a single NBU was inappropriate and that several NBU pools were necessary.

More significantly, the examining agent proposed a Sec. 481(a) adjustment to implement the change in the taxpayer's pooling practice. The taxpayer contended that the transitional cutoff rule of Regs. Sec. 1.472-8(g) applied, rendering a Sec. 481(a) adjustment unnecessary. However, contrary to the National Office's voluntary ruling policy, the memorandum held that the transitional cutoff rule of Regs. Sec. 1.472-8(g) did not apply when the taxpayer's current method of pooling was always erroneous and the issue was raised on examination. Therefore, to achieve a clear reflection of income, the examining agent was permitted to restate prior year layers using the proper method.

If a taxpayer's present pooling method is determined to be clearly erroneous, consideration should be given to voluntarily filing Form 3115. It is understood that the transitional rule of Regs. Sec. 1.472-8(g) will apply and the change should be granted on a cutoff basis, without a Sec. 481(a) adjustment.

On another LIFO matter, a simpler alternative in the computation of pre-adjustment alternative minimum tax (AMT) income and adjusted current earnings (ACE), Prop. Regs. Sec. 1.56(g)-1(r) provides that taxpayers may elect to use their regular tax inventory amounts for these purposes. Thus, taxpayers making the election would use the cost...