TEI opposes LIFO repeal, urges retention of current practice for filing schedule E: also comments on Canadian Tax Reform and other topics, releases U.S. liaison meetings Minutes.

• Position: Recent Activities

Comments submitted during the last few months have demonstrated the depth and breadth of Tax Executives Institute's global presence. In June, TEI urged the Senate Finance Committee to retain the last-in, first-out inventory (LIFO) accounting method as part of the Internal Revenue Code. The Institute also commented to the Internal Revenue Service concerning the proposed electronic filing of the Schedule E (Compensation of Officers), suggesting the IRS continue to permit taxpayers to protect officer privacy and file the schedule with "details to be provided upon request."

TEI also advised Canada's new government on ways to improve the Canadian tax system. Additionally, the Institute submitted comments, for the fifth time, critiquing the latest itineration of proposed Canadian legislation on taxation of foreign investment entities.

Coordinated by the Institute's new European Tax Committee, comments were also submitted to the European Commission on modernization of the value-added tax (VAT) system. Finally, the minutes of TEI's February 2006 liaison meetings with the U.S. Department of Treasury and IRS's Large and Mid-Size Business Division have been released.

Repeal of LIFO

On June 9, 2006, TEI President Michael P. Boyle sent a letter to Senators Charles E. Grassley and Max Baucus, chair and ranking member of the Senate Finance Committee, urging the retention of the LIFO inventory accounting method. A proposal to repeal the LIFO method was included in the proposed Gas Price Relief and Rebate Act of 2006, but was subsequently withdrawn to permit Congress additional time to study the issue.

Mr. Boyle noted that "repealing the LIFO method--which the Code has permitted for nearly seven decades--would adversely affect many business taxpayers by increasing their tax bills, potentially leading to a significant loss of U.S.-based jobs." He explained that the objective of LIFO is to permit taxpayers to properly match their current sales revenues with the current replacement costs and thereby compute--and pay taxes on--a meaningful gross profit amount.

"Under LIFO," Mr. Boyle said, "changing prices for various components of manufactured or purchased inventory are reflected immediately in the cost of goods sold rather than being capitalized in inventory. As a result, in a period of rising prices, the LIFO method tempers the distortive effect of inflation on the taxpayer's reported profits. Under the LIFO method, U.S. businesses are able to recoup more quickly the rapid increases in the replacement cost of the products they manufacture or purchase."

First permitted in the Revenue Act of 1938, the LIFO method is widely used by many taxpayers. The LIFO method is likely the predominant method of accounting in industries that carry inventories of goods, especially those engaged in manufacturing, mining, wholesaling, retailing, distribution, and energy production, TEI's president stated.

"For nearly 70 years," Mr. Boyle concluded, "the LIFO method has provided for the proper matching of revenues and expenses in the computation of the cost of goods sold and taxable profits, especially in periods of rising prices." Moreover, taxpayers may use LIFO only if their financial accounting treatment of inventory conforms with their tax accounting method. "Raising the taxes of a significant segment of the U.S. economy--LIFO users--without considering the anti-competitive effects of LIFO's repeal on those businesses is short-sighted and may produce unintended consequences that are far greater...