Subsidiary's nonconforming inventory method will not violate group's conformity.

• Author: Kautter, David J.

In Letter Ruling 200239032, the Service ruled that a parent can compute and report (on its consolidated financial statements) a subsidiary's inventory method change, to a method different from that of other group members, without violating the Sec. 472(e) and (g) conformity requirements.

Under the facts, the parent, a C corporation, uses the LIFO method for Federal income tax purposes. Its operations are included in consolidated financial statements. Each group member included in the statements files its own separate Federal return and reports its inventory under the LIFO method. A subsidiary wants to change to the FIFO method for both Federal income tax and consolidated financial statement purposes.

Discussion

Even though a taxpayer may elect the LIFO method (as long as it clearly reflects income), Sec. 472(c) requires the taxpayer to then also use LIFO for financial-reporting purposes. This conformity provision was the subject of Insilco Corp., 73TC 589 (1979), aff'd by unpublished op., 659 F2d 1059 (2d Cir. 1981), nonacq., 1982-2 CB 3, withdrawn, 1987-2 CB 1, in which Insilco's subsidiaries used the LIFO method for both their separate financial statements and Federal income tax returns. However, in its consolidated financial statements, the parent used a non-LIFO method to report the subsidiaries' inventories. The Tax Court concluded that the consolidated financial statements issued to shareholders did not violate the Sec. 472(e) LIFO conformity rules.

In response to this decision, Congress enacted Sec. 472(g), which generally provides that any group of corporations "consolidating or combining for purposes of financial statements" is treated as one taxpayer for LIFO-conformity purposes. Thus, under Sec. 472(e) and (g), if a subsidiary uses the LIFO method, the parent must use LIFO for reporting the subsidiary's inventory in its consolidated financial statements issued to shareholders.

Subsequent to the enactment of Sec. 472(g), the Service addressed the question of whether conformity should apply at the individual group-member level or to the group as a whole. In Rev. Rul. 88-69, a parent filed a consolidated Federal return for itself and its two subsidiaries. For both Federal income tax return and financial-reporting purposes, it reported its inventory and one subsidiary's...