IRS releases proposed regulations on IPIC LIFO pooling

Tax Hot TopicsThe IRS released proposed regulations under the last-in, first-out (LIFO) method to add rules for inventory price index computation (IPIC) pooling that would require taxpayers to maintain separate pools for manufactured goods and goods purchased for resale. The regulations, which would revise Treas. Reg. Sec 1.472-8, are not effective until finalized.

Under the dollar-value LIFO method, pooling of similar goods is required to determine whether there has been an increment or decrement (i.e., an increase or decrease in inventories) in the year. Manufacturers that do not use the IPIC method are generally required to use either natural business unit (NBU) pooling or multiple pooling. Resellers that do not use the IPIC method are generally required to establish LIFO pools based on major lines, types or classes of goods. When a manufacturer is also engaged in wholesaling or retailing of goods purchased from others, the resale goods are not allowed to be a part of any manufacturing NBU pool. Resellers that are also engaged in manufacturing are required to follow the pooling rules for manufacturers for the manufacturing operations.  

Taxpayers using IPIC LIFO also have the option to use the IPIC pooling method. Under this method, pools are established based on the two-digit commodity codes in either Table 9 of the Producer Price Index (PPI) Detailed Report for manufacturers or Table 3 of the Consumer Price Index (CPI) Detailed Report for resellers. Within the IPIC pooling rules are two 5% simplifying rules, which allow manufacturers or resellers to first combine any IPIC pools that comprise less than 5% of the total inventory value of all pools to form a single miscellaneous pool. If that miscellaneous pool is in total less than 5% of the total inventory value of all the pools, the taxpayer may combine the miscellaneous IPIC pool with its largest IPIC pool.

Under the proposed regulations, a taxpayer who elects to use the IPIC pooling method may not comingle manufactured goods and resale goods within the same IPIC pool. As described in the preamble to the regulations, the IRS believes that this is consistent with the general LIFO pooling rules and limits cost transference between separate economic activities.  

The proposed regulations require that a taxpayer using the IPIC pooling method for its manufactured goods must also use the IPIC pooling method for its resale goods and vice versa. Additionally, taxpayers using the 5%rules must establish a miscellaneous pool for manufactured goods and a separate miscellaneous pool for resale goods. For example, a manufacturer may combine the miscellaneous manufactured goods pool with the largest manufactured goods pool; however, the miscellaneous resale goods pool must remain a separate pool.

The regulations are proposed to apply for taxable years ending on or after the date the regulations are published as final regulations; therefore, the proposed regulations are not yet effective. The IRS is requesting comments be received by Feb. 27, 2017. They would specifically like comments related to the requirement that a taxpayer engaged in both manufacturing and resale activities in the same trade or business use IPIC pooling for both activities, if elected. 

Contact Sharon Kay
Partner, Washington National Tax Office
+1 202 861 4140

Ellen Martin
Partner, Washington National Tax Office
+1 202 521 1558

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.