The "simplified" IPIC method.

• Author: Woehrle, Christine
• Position: Inventory price index computation

The IRS recently issued revised final regulations for published price indexes under the dollar-value LIFO inventory method, effective for tax years ending on or after Dec. 31, 2001.

Background

Under dollar-value LIFO, taxpayers track inventories in dollar terms rather than units. They must either compute their own internally generated index or use an index approved by the IRS. The index reflects the inflation in inventory accounted for under LIFO. In computing an internal index, taxpayers compare the inventory's base-year at the end of the year with that at the beginning of the year, to determine if the investment in inventory has increased or decreased in constant (i.e., base-year) dollars.

The inventory price index computation (IPIC) is a sub-election of dollar-value LIFO. It is a method of determining an inflation index used in computing LIFO inventories with reference to the Bureau of Labor Statistics (BLS) Producer Price Index (PPI) or Consumer Price Index (CPI), rather than internally generated indexes. Congress intended the IPIC method to simplify the use of dollar-value LIFO, so that taxpayers could use an alternative method of computing their LIFO index.

Legislative History

On March 16, 1982, the IRS issued final regulations on published price indexes. One of the most significant provisions was that under IPIC, inflation was generally limited to 80%, of the change in the published indexes for taxpayers with gross receipts over $5 million. Taxpayers with gross receipts less than that amount were permitted to use 100% of the percent change in the selected indexes (prior to the Tax Reform Act of 1986, the 80% limit applied to taxpayers with gross receipts over $2 million). At the time, the IRS believed that the 80% change would approximate the inflation in inventory for many of the larger companies that would use LIFO.

On May 19, 2000, the IRS issued proposed regulations to simplify and clarify certain aspects of the IPIC method. On Jan. 8, 2002, it issued final regulations that contain several revisions and clarifications, most notably the elimination of the 80% limit. As noted, they are effective for tax years ending on or after Dec. 31, 2001.

Significant Changes

Inventory price index--20% reduction. The IRS eliminated the 80% limit (or "20% haircut"). Taxpayers electing the IPIC method can now use 100% of the pool index--now called the inventory price index (IPI)--to compute the LIFO value of a dollar-value pool.

10% categories and BLS weights. The new regulations retain the 10% BLS categories and BLS weights as an elective method (10% method) for determining a category's inflation index. They clarify that the 10% level is measured by comparing the current-year cost of the items in a category to the total current-year cost of the items in the dollar-value pool (not to the current-year cost of the items in...