TEI urges retention of the LIFO inventory method.

• Position: Tax Executives Institute, Last-In, First-Out

On June 9, 2006, Tax Executives Institute President Michael P. Boyle submitted the following letter to Senators Charles Grassley and Max Baucus, Chair and Ranking Member of the Senate Finance Committee, respectively, urging retention of the LIFO method of accounting.

On behalf of Tax Executives Institute (TEI), I am writing to urge that the Last-In, First-Out (LIFO) inventory accounting method be retained as part of the Internal Revenue Code. A proposal to repeal the LIFO method was included in proposed legislation entitled the Gas Price Relief and Rebate Act of 2006, but was subsequently withdrawn in order to afford Congress additional time to study the LIFO method's utility and purposes. As the preeminent global association of in-house business tax professionals, the Institute believes 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.

Tax Executives Institute is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the costs and burdens of administration and compliance to the benefit of taxpayers and government alike. TEI's 6,000 members represent 2,800 of the leading companies in the United States, Canada, Europe, and Asia. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance and is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its audit function without unduly burdening taxpayers.

Stated simply, TEI believes the inclusion of the LIFO repeal proposal in the Gas Price Relief and Rebate Act was misguided. The objective of the LIFO accounting method 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, 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...