The Department of the Treasury released proposed regulations in the Federal Register (REG-125946-10) that relate to the establishment of LIFO inventory pools by certain taxpayers that use the IPIC pooling method. The proposed regulations provide rules regarding the proper pooling of manufactured or processed goods and wholesale or retail (resale) goods. The proposed regulations would affect taxpayers who use the IPIC pooling method and whose inventory for a trade or business consists of both manufactured or processed goods and resale goods. See the full details at the IRS website: Dollar-Value LIFO Regulations: Inventory Price Index Computation (IPIC) Method Pools
Impact of Proposed Regulations
The LIFO pooling method rules are contained in Reg. Sec. 1.472-8(b) & (c). These LIFO pooling method rules prior to the proposed Regs. revision contain no language that makes it clear that separate LIFO pools are required for manufacturing v. resale operations.
The IRS has long held the position that resale v. manufacturing pools should not be comingled. There were a couple of Revenue Rulings and a Private Letter Ruling written in the 1970s and 1980s stating this position. The LIFO Regs. were revised in 2002 to incorporate new IPIC method rules including rules for the IPIC pooling method in Reg. Sec. 1.472-8(b)(4) and (c)(2) but these rules did not make clear that separate manufacturing and resale pools were required when the IPIC pooling method was used. Because of this, some taxpayers and CPAs were led to believe that manufacturing and resale pools could be comingled when the IPIC pooling method was used.
The Treasury is now amending the Regs. to make clear their intent that manufacturing and resale pools not be comingled when the IPIC pooling method is used.
If the proposed Regs. are made final in their present form, manufacturers that have resale operations will need to establish separate pool(s) for the resale operations inventories and resellers that have manufacturing operations will need to establish separate pool(s) for the manufacturing operations inventories if they presently comingle pools as described above.
A change in LIFO pooling methods requires the filing of Form 3115 Application for Change in Accounting Method. There is no de minimis provision in the proposed Regs. which means that these rules apply regardless of the value of the inventories in question. The November 28, 2016 Federal Register publication containing the proposed IPIC LIFO reg. can be viewed/downloaded below.
The AICPA also issued a comment letter in response to the proposed regulation. The letter can be viewed here: REG-125946-10 – Dollar-Value LIFO Regulations: Inventory Price Index Computation (IPIC) Method Pool