Prop. regs. simplify LIFO IPIC Method.

• Author: O'Connell, Frank J., Jr.
• Position: Last-in-first-out inventory accounting

Under the dollar-value LIFO method, taxpayers compute LIFO inventory by comparing current-year costs with base-year costs to develop an index. Taxpayers use the index to convert current-year inventory costs to base-year dollars. Often, the index calculation becomes complicated and burdensome. In 1992, Regs. Sec. 1.472-8 simplified the calculation with the introduction of the inventory price index computation (IPIC) method. The IPIC method was intended to simplify the use of the dollar-value LIFO method, so that more taxpayers could use it. The IPIC method was also easier for taxpayers already using the dollar-value LIFO method.

Generally, the IPIC regulations allow taxpayers to compute an inventory price based on selected consumer or producer price indexes that the Bureau of Labor Statistics (BLS) prepares and publishes monthly in the Consumer Price Index Detailed Report (CPI) or Producer Prices and Price Indexes (PPI).

Prop. Regs. Sec. 1.472-8 was recently issued to "simplify and clarify certain aspects of the IPIC method," as well as to modify the method, so that it "produces a more accurate and suitable inventory price index."

Elimination of Certain Conversion Requirements

Currently, manufacturers that use the PPI must convert the selected indexes into cost indexes. Similarly, retailers (other than those using the retail inventory method) that use the CPI must convert their selected indexes to a cost index. This calculation should be made separately for each category of goods, which adds substantial complexity to the IPIC calculation. Further, because of the conversion to a cost index, a change in the taxpayer's gross profit percentage has the same effect as inflation or deflation. As a result, the cost conversion can substantially affect a taxpayer's LIFO index.

Prop. Regs. Sec. 1.472-8 eliminates the requirement to convert published price indexes into either retail price indexes or cost price indexes. According to the preamble, the IRS has concluded that the administrative burden of converting published indexes into retail price or cost price indexes outweighs any benefits of increased accuracy from the procedure.

Elimination of Requirement for 10% Categories and BLS Weights

For purposes of computing an inventory price index, Prop. Regs. Sec. 1.472-8 provides the following detailed rules for assigning inventory items to index categories published in the CPI or the PPI:

1. First assign the items to the most detailed index that contains...