The 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.
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