Close
Close

IRS clarifies LIFO recapture when an S corp acquires a consolidated group

RFP
Tax Hot Topics - IRS clarifies LIFO recapture when an S Corp acquires a consolidated group The IRS has issued a field attorney advice memorandum (FAA 20153001F) clarifying how recapture from the last-in, first-out (LIFO) method of accounting should be reported on a tax return reporting a single transaction under Section 1363(d)(4)(D) when a C corporation converts to a qualified subchapter S subsidiary.

The FAA addressed an S corporation that acquired the stock of a C corporation. The C corporation was the common parent of an affiliated group that had elected to file a consolidated federal income tax return (the taxpayer group). The S corporation filed qualified subchapter S subsidiary (QSUB) elections for the C corporation and its subsidiary and disregarded entity as of the day after the acquisition. The C corporation filed a final consolidated tax return from the first day of its tax year  through the end of the day of the acquisition (the day immediately before the effective date of the QSUB elections). Thus, pursuant to the QSUB elections and beginning as of the day after the acquisition, the activity of the C corporation and its subsidiary and disregarded entity would be reported on the S corporation’s tax return.  
 
Importantly, both the subsidiary and disregarded entity used the LIFO inventory accounting method. Thus, under Section 1363(d), the LIFO recapture amount related to this inventory was required to be included in gross income for the last taxable year of the corporation. Section 1363(d)(4)(D), however, provides that the LIFO recapture amount cannot be reported when the corporation at issue is a member of an affiliated group. Thus, the taxpayer group did not report the LIFO recapture amount on its final consolidated tax return. Instead, the C corporation filed a second tax return that was a stand-alone “single transaction return” reporting only the amount of the LIFO recapture.

The IRS Service Center initially rejected the single transaction return. The IRS Associate Area Counsel, however, agreed in the FAA with the C corporation’s filing methodology and instructed the Service Center to process the single transaction return accordingly.

Contact
Andy Cordonnier
+1 202 521 1502
andy.cordonnier@us.gt.com

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.