FIFO / LIFO

 

Significant Court Cases, Revenue Rulings, Internal Revenue Codes, and Treasury Regulations

 

Consolidated Manufacturing, Inc., 111 T.C. No. 1, July 20, 1998
LIFO - Remanufacturing Inventory of Cores
Ruling:

  • LIFO must be elected for an entire "good" and not a portion of the goods such as labor and overhead.

  • For remanufactures, cost and market equal the core amount shown on the invoice corresponding to the remanufactured part.

  • The Court supported the IRS authority to terminate an improper LIFO election.

E.W. Richardson, T.C. Memo 1996-368, August 12, 1996
LIFO - Definition of an Item
Ruling:

  • An auto dealership made an unauthorized change in accounting when it changed its definition of a LIFO inventory item from "vehicle body size" to "model line".

  • The decision reaffirmed that the definition of an item for LIFO inventory is a method of accounting and that the taxpayers must apply the method consistently.
    - See Richardson Investments, Inc., 76 T.C. 736

Fox Chevrolet, Inc., 76 T.C. 708, May 11, 1981
LIFO - Pooling
Ruling:

  • Two separate pools are required for purposes for new car LIFO.
    - New automobiles
    - New trucks

Mountain State Ford Truck Sales, Inc., 112 T.C. No. 7, March 2, 1999
LIFO - Replacement Costs
Ruling:

  • For LIFO inventory purposes, taxpayers must use actual cost and not replacement cost.

  • The use of replacement cost does not clearly reflect income.

  • The IRS did not abuse its discretion by adding the taxpayer's LIFO
    reserve back to income since the taxpayer failed to keep adequate records to compute LIFO using any other method.

Richardson Investments, Inc., 76 T.C. 736, May 11, 1981
LIFO - Pooling
Ruling:

  • An automobile dealership could not use one pool consisting of new cars and new trucks, for LIFO purposes.

  • The Court determined that the dealership should use one pool for new cars and one pool for new trucks.

  • See E.W. Richardson, T.C. Memo 1996-368

Wendell Ford Sales, Inc., 72 T.C. 447, June 7, 1979
LIFO - Definition of an Item
Ruling:

  • The addition of a catalytic converter and a solid state ignition system did not make the 1975 Ford vehicle a different "item" for LIFO purposes than the 1974 Ford vehicle.

IRS Approves the LIFO Method of Inventory for Used Car Dealers

On January 19, 2001, the Internal Revenue Service published the long awaited Used Vehicle Alternative LIFO Method; Procedure 2001-23. The new method incorporates a computational methodology similar, although with some significant differences, to the method used in Revenue Procedure 97-36, Alternative LIFO for New Vehicles. The publication of the simplified method is part of a major initiative by the Service to provide specific guidance to taxpayers on industry issues.