LIFO on Life Support
Up until recently, LIFO has been an unremarkable part of the Tax Code. Almost 70 years ago, Congress authorized taxpayers to use the Last-in, First-out (LIFO) inventory method. At the time, LIFO's proponents represented to Congress that it was conservative accounting during periods of inflation.
By matching current costs (of replacement inventory) with current revenues, LIFO tends to prevent inflationary profits from being reported in earnings. Perhaps because LIFO was promoted as sound accounting, Congress attached an unusual condition upon the use of LIFO for tax purposes: it must also be used for financial reporting purposes. Current Code section 472(c).
LIFO was on the senate hearing agenda as being little better than tax shelters. A professor of accounting, invited to testify about the LIFO method, was clearly no fan. He, and another witness, characterized the use of LIFO as almost always tax-motivated.
The effort to repeal LIFO is fueled by a couple of factors, one obvious, the other not so apparent. The transparent motivation for Congress is the revenue pick-up that LIFO repeal would generate.
The accounting professor estimated the increase at $18 billion, based upon estimated LIFO reserves of approximately $60 billion and an assumed tax rate of 30 percent. (These estimates seem low, since they are based upon the LIFO reserves reported in financial statements. It is commonly understood that these “book” LIFO reserves are significantly lower than the actual tax LIFO reserves because of the accounting rule that eliminates “book” LIFO reserves in an acquisition.) But, regardless, Congress could find a lot of ways to spend an extra $18 billion, like an AMT fix.
A more subtle motive for Congressional action lies in an institution totally unrelated to Congress, the Financial Accounting Standards Board (FASB).
The FASB has undertaken a project (the “convergence” project) to conform U.S. accounting standards with international standards, which are set by the International Accounting Standards Board (IASB). The IASB generally bans the use of the LIFO method. If, as it is sometimes rumored, the FASB were to conform to the IASB model, and ban the use of the LIFO method, the LIFO method would be “automatically” repealed for U.S. tax purposes.
That's because of the conformity requirement. If a company were no longer permitted to use the LIFO method for its financial reports, the company would thereby be forced to go off LIFO for tax purposes because of section 472(c). If these twin events occurred, there would be no revenue increase that Congress could use for scoring the budget. That's because the increase in revenues would have come about as a consequence of existing law (§ 472(c)), and not as a result of an amendment to the Code.
So, unless Congress acts affirmatively to repeal LIFO, it might lose the opportunity to count repeal as a revenue-raiser.
However, as noted, you can anticipate that the nation's LIFO taxpayers will “not go gentle into that good night.”
The LIFO taxpayers range from the high-profile major oil companies (think what their profits would look like on FIFO) to the less-visible, like automobile dealers. They have gotten together to organize a lobbying effort (the “LIFO Coalition”) to oppose LIFO repeal.
Article provided by George White, AICPA Tax Division |
