TAM links scope of LIFO election to LIFO pooling method.

• Author: Sehman, Tom
• Position: Technical Advice Memorandum, last in/first out

In Technical Advice Memorandum (TAM) 200603027, the JRS concluded the scope of a LIFO election is "linked" to a taxpayer's LIFO pooling method; thus, the taxpayer's LIFO election must extend to all items that fall within the LIFO pools.

Facts

The taxpayer used the dollar-value, inventory price index computation (IPIC) LIFO method. It had received ISS consent (through an automatic method change) to use the IPIC pooling method for its LIFO inventory. Prior to the change, the taxpayer had received IRS advance consent to use a non-LIFO method to account for certain inventory departments or categories. Generally, its non-LIFO inventory items experienced deflation rather than inflation. If the taxpayer had used the LIFO method to account for these inventory items, the items would have fallen within its IPIC pools.

Background

Under Regs. Sec. 1.472-8(a), the dollar-value LIFO method is a way to determine the cost of a pool of goods. A taxpayer using this method treats all goods inventoried under the LIFO method that fall within a pool as fungible. Instead of measuring quantity changes based on the number of units of specific goods in ending inventory, the taxpayer computes, for the pool as a whole, the net change in inventory investment measured in terms of equivalent value dollars.

The IPIC pooling method requires grouping LIFO inventory according to (1) the two-digit commodity codes in Table 6 of the Producer Price Index Detailed Report or (2) the general expenditure categories in Table 3 of the Consumer Price Index Detailed Report.

In the TAM, the IRS concluded the taxpayer's use of the IPIC pooling method did not clearly reflect income, because the taxpayer employed a non-LIFO method for items that would be included in its IPIC pools had it used the LIFO method to account for those items.

As a result of this holding, the IRS revoked the method change that had given the taxpayer consent to use a non-LIFO method to account for certain departments or categories of inventory. In addition, it revoked the automatic method change that had given the taxpayer consent to use the IPIC pooling method for LIFO inventory.

Technical Observations

The conclusion reached in TAM 200603027 is significant. It introduces the "linkage" concept, which means a taxpayer's LIFO method will not clearly reflect income without a link between the scope of the LIFO election and the LIFO pooling method. Further, the TAM concluded that the linkage requirement underlies the...