Authored by Patrick Balthazor and Kathleen Meade
On Nov. 25, 2016, the IRS issued proposed regulations clarifying that taxpayers using the inventory price index computation (IPIC) pooling method for their LIFO inventory may not comingle manufactured goods and purchased goods in the same pool(s) and explaining how the elective 5 percent rules are applied when a LIFO taxpayer using the IPIC pooling method conducts both manufacturing and reselling activities in the same trade or business.
The general § 472 pooling rules applicable to LIFO taxpayers provide that when a taxpayer is engaged in both manufacturing or processing activities and also purchases goods for resale in the same trade or business, the manufactured or processed goods may not be included in the same pool as the purchased goods. Reg. § 1.472-8(b)(4) allows a manufacturer or processor using the IPIC LIFO inventory method to establish pools using certain commodity codes in tables that are published by the Bureau of Labor Statistics (BLS) (i.e., the IPIC pooling method). The use of the IPIC pooling method is an alternative to other permissible pooling methods (e.g., natural business unit pooling method). Similarly, wholesalers and retailers may elect to use the IPIC pooling method under Reg. § 1.472-8(c)(2) as an alternative to other permissible LIFO pooling methods (e.g., pooling based on major lines, types or classes of goods). Ambiguity in the current IPIC pooling rules with respect to combining manufactured and purchased items in the same pool(s) has resulted in exam controversy for taxpayers using IPIC pooling. The proposed rules, which contain examples illustrating the application of these provisions, are designed to remove the ambiguity and reduce IRS exam controversy in this area.
The proposed regulations make it clear that combining manufactured and purchased goods in the same pool is not allowed when using IPIC method pools and explain how the elective 5 percent rules are applied when a LIFO taxpayer using the IPIC pooling method conducts both manufacturing and reselling activities in the same trade or business. The proposed regulations are effective when published as final. Additionally, the IRS specifically requests comments on the requirement that a taxpayer engaged in both manufacturing and resale activities within the same trade or business use IPIC pooling for both activities.
- In light of the IRS exam position, IPIC LIFO taxpayers using the IPIC pooling method and comingling manufactured and purchased items in the same IPIC pool(s) or improperly applying the 5 percent rule(s) may wish to consider filing Form 3115 to obtain IRS consent to change their pooling method now, rather than wait for the proposed rules to be finalized. This change may generally be made under the automatic change procedures assuming the taxpayer meets the eligibility requirements and the terms and conditions for this change.
- Taxpayers currently not using IPIC or using a non-IPIC pooling method in conjunction with IPIC (e.g., pooling based on natural business units or by line, type or class of goods) that combines manufactured and purchased goods in the same pool(s) are not in compliance with the current LIFO pooling rules and should file a Form 3115 as soon as possible to change to a permissible pooling method. Taxpayers changing to the IPIC method and certain pooling changes made by manufacturers may qualify to make this change under the automatic change procedures assuming the taxpayer meets the eligibility requirements and the terms and conditions for the change.
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